Binary options incorporate with the theory of “all or nothing”; Either you can earn great percentage of profit on your investment or you can lose the whole amount of it, within a certain time limit.
Binary Options Terms:
Is the price at which trade will commence or the rate at which binary options holder can place put call trades on any securities.
The time when the trade will get closed.
How Binary Options works?
Suppose, stock ABC is currently trading at $56.00.
You have analyzed that the market will reach towards $60.00 in the next 3 hours. Therefore if you have placed a trade on the buy-side call options with a strike price of $60; with 90% return, you can earn $90 from your $100 initial investment.
If you lose on your betting, say ABC share didn’t move to $60 in the next 3 hours. Then you will lose only the $100 of your investment. That means on a $5000 account, only a maximum $100 risk no matter where ABC stock moves or crashes.
Binary Options Trade Variation:
With some binary broker, you will be able to trade high low trading system, which does not have strict rules with the strike price.
High low trade only checks, if the market goes above or below from the entry price or not.
As the above example stated, if ABC stock reaches $58 from $56 entry price at the expiration time, the trader will win the trade. Because the ending price is higher than the starting price.
Even if its higher than $2 or 2 pips (in case of forex), you will still earn profits.
In this method, a trader needs to place a bet on a certain price level, which market will meet before the binary options trade expiration time.
Similarly, with the 1st example, a trader might bet that ABC stock price will either touch $60 or does not touch $60 in the next 3 hours. This kind of binary options trading works best with range market or with range breakout system.
Higher & Lower:
This is almost the same as high low binary options trading. The only difference is, the trader need to place a bet on how much higher or lower market will go from the strike price.
Same with the 1st example, if the strike price is $56, then a trader can bet after 3 hours, the market will go $5 higher than the strike price. Which means before the expiration time stock price needs to reach $56+$5 = $61 to win the trade.
Stays in or Goes outside:
This method is similar to touch no touch type of binary options trading. The only difference is this trader will place a bet that ABC stock price will go outside of a price band or stays inside of a price band.
For example, a trader can set a range of $50 to $60 for ABC stocks. After the expiration time of 3 hours, ABC stock will either stays inside $50 to $60 range or goes outside of it.