Binary Options Explained
With every binary option trade you make you are relying on 3 basic and equally important components: The underlying asset, the binary option contract and the prediction, or forecast, we thought we’d take some time to explain these crucial elements to clear up any possible confusion and get you better acquainted with the basics of binary options. By the time you finish reading this short article you will have an answer to the question: What are binary options?
The Underlying Asset
Nearly all binary option platforms are able to offer a wide variety of assets for you to trade, these assets can include anything from commodities and stocks through currency pairings and indices from all over the globe, as a trader you can choose to invest in a diverse portfolio that includes multiple options or you can choose to invest your knowledge and funds in a specific selection of assets or markets, both are great ways to turn a profit.
The Binary Option Contract
Binary option contracts typically last anywhere from one hour to one month, but offers traders the ability to buy contracts that are even shorter-term—down to five minutes before they expire. To make accurate predictions, it is important to know exactly how much time is left before an option expires
Most binary option contracts vary greatly in length; short contracts can last one hour, while longer ones can be active for days and weeks, there are even contracts of shorter or longer durations, depending on your own preference.
The importance of the contract’s duration cannot be overstated – an intelligent trader must always account for the time remaining before the contract’s expiry to make a more educated prediction or forecast.
The Forecast or Prediction
The job of a trader or investor is to determine which direction the price of an underlying asset will move before its option’s time of expiration. Traders who believe that an asset price will rise should buy a Call option. Traders who believe that an asset price will fall should buy a Put option. Correct predictions can earn traders high returns that nearly double their investments.
Just as you would in any other position, as a trader you have responsibilities, the most important one being the forecast or prediction, this is where fortunes can be won – determining the direction an asset’s price takes prior to expiring.
If you see the price rising above its current level go ahead and purchase a “call” option on your asset, and if you think the market is about to go down, you would be better served by buying a “put” option.
Making the correct prediction is your way of insuring profits, possibly even doubling your initial investment in some cases.
There are many advantages to trading binary options in a digital way but the two main ones are “Close Now” and “Roll Over”, both were created to give you an ability to better manage your risk on any given trade.
You could be the best trader around, but everyone sometimes makes mistakes, read the market incorrectly and simply make a bad investment, to that end, we are providing you a “close now” option which will allow you to cancel a trade prior to the expiry time. You can choose to close an option for any reason, but most often this is done because your chosen asset is not behaving in a way that is what you expected.
Let’s assume you purchased a 3 hour call option when suddenly, halfway through the contract term the price starts to collapse after initially making some gains, at that point, you could use the “close now” feature to insure yourself at least a portion of the profit, regardless of how it performs the rest of the way.
If things go entirely the other way on a trade, you can use the “close now” feature minutes into a trade, and cut potential losses before they turn catastrophic.
The exact opposite of “close now”, the “roll over” feature was built so that you can extend an option’s expiry time, which will afford you more time for your selected option to finish in-the-money.
If you got yourself a nice little 1 hour put option on crude oil with the belief that the price is about to trend downwards and 15 minutes before expiry the price reverses direction and begins to make a small upward correction, taking you out of your winning position you can, for a small payment, extend the expiration time and give your black gold an option to resume its downward direction, giving you ample chance to finish in-the-money.