How Do Binary Options Work?

What are binary options?

Binary options are often called ‘all-or-nothing options’, ‘fixed return options’ or ‘digital options’. It allows you to place a bet on share prices, markets, foreign exchange currencies, and other economic events. You either receive a payment on the option if you win the bet or lose your entire investment.

Types of binary options

The two most common binary options are ‘One touch binaries’ and ‘No touch binaries’.

Interested in shares and company structure? Click here to read up on the differences between companies limited by shares versus guarantee.

One touch

If you pick this option that means that you are betting that the asset will reach a certain point before the option expires. For example, if you bet that the share price of a company will go passed $2 in one week and that company goes to any value over $2 within that one week, you will win the bet. It does not matter how long the share price was above $2 because it has already touched that set point. Passing it once is all that is required for the conditions of this option. These options pay more where the set point or trigger is further away from the spot price. The value of the asset at the time of the option being created is the spot price.

Double one touch

This type of binary option is identical to the one touch option but it has an additional set point or trigger on the opposite side of the first one. Going back to the example with the share price passing $2. If we had a double one touch option, we would have another set point lower than $2, lets say $1. If the share price during the time of the option goes under $1 we would still win the bet. You should choose one touch options when you are sure that the asset price will strongly move in a certain direction. If you are sure that it would move but are not sure in which direction, the double one touch option is a good choice.

No touch

No touch binaries are the opposite of the one touch binary options. For this option, you would bet that the asset will not reach a certain value before the option expires. You would lose your entire investment if the asset touches or goes above the value during the time period. For example, if you purchased a no touch binary option on the condition that the share price of a company will not go passed $2 for the entirety of a week. If the share price at no point touches $2 or goes passed it you would receive a payout. These options pay more where the set point or trigger is closer to the spot price.

Double no touch

Double no touch options use the same mechanism as no touch but have another trigger point on the other side. Going back to our example for the no touch option. If you are sure that the share price will not go passed $2 and are sure that it wont go lower than $1, you would purchase this option. The harder an option is to fulfill the more payout it gives. Go with this option if you are sure that the asset price wont fluctuate passed a small range.

How to make sure that the options provider is legitimate

If you are concerned about the legitimacy of an options provider, it is best practice to search the provider through ASIC Connect’s Professional registers.

When looking through this register, make sure that the provider has an Australian financial services (AFS) licence, or is authorized by an AFS licensee.

Risks of binary options

Yes, you can make a lot of money by trading options. Often however, losing the entirety of your investment is commonplace among investors. Four out of five investors who trade binary options did not make a profit according to ASIC’s review. This should not be discouraging if you are considering purchasing options, however, it is necessary to go into it with realistic expectations and a budget.

Conclusion

Binary options are high risk high reward investments that work by betting that a certain asset’s price will or wont reach an established value. Although profitable, you should exercise care when purchasing these options due to the high chance that your investment will be lost. As an investor, you should only bet with what you are comfortable with losing.

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