A binary option is a unique investment tool that has given more people the opportunity to get involved in options. An option contract gives an investor the opportunity to buy or sell an asset at a given price and time. While it gives them the opportunity, it does not come with it any obligation. Therefore, options present investors with a very flexible form of investment. Many investors are unfamiliar with how to trade options in general and more specifically, binary options. Here are the basics of trading a binary option and how to go about doing so.

What Are Binary Options?

A binary option carries with it the basic characteristics of an option. However, it is unique in the sense that there are only two outcomes. These are also sometimes called "all or nothing" options because you can only win something or nothing. There are no partial wins or losses. Sense there are only two possible outcomes, this is why they are referred to as binary options. It is this factor that makes the binary option one of the simplest option models to understand for investors. This has lead many investors that would not feel comfortable getting involved in other types of options, choose the binary option as one of their investments. 

When you set up a binary option, you are betting whether or not you think the price of the asset is going to be above or below a certain point on a certain date. If you say the price will be above and it is above on that date, you win. If it is below, you receive nothing. 

Why Choose Binary Options?

With so many types of options out there, why would anyone decide to go with a binary option? This type of investment is great if you have a general feel about an underlying asset or industry. You generally believe that you know where a particular type of asset is headed in the near future.

For example, you like to prospect oil and you believe that six months from now, oil will be higher than it is now. You would then take out a binary option that says that you believe the price of oil will be above a certain point six months from today. You have an option contract written up that spells out the details and how much that contract would be worth if you correctly predict the threshold price.

Six months goes by and you look at the price of oil. The price of oil has gone up above the threshold just like correctly predicted. This means that you would win the value of the option contract that you set up at the beginning of the term.

This form of investment is black and white. It is easy to understand and also very easy to evaluate whether you have won or lost at the end of the term. It is actually one of the simplest forms of options out there in the market today. 

 

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