2. Know the two possible outcomes
A trader of binary options should have some feel for the
anticipated direction in price movement of the underlying
asset. Within most platforms the two choices are referred
to as "put" and "call." Put is the prediction of a price
decline, while call is the prediction of a price increase.
Unlike traditional options, anticipating the magnitude of a
price movement is not required. Instead, one must only be
able to correctly predict whether the price of the chosen
asset will be higher or lower than the "strike" (or target)
price at a specified future time. If the investor has an
opinion on an underlying asset and wants to place a trade,
s/he can trade binary 0ptions.
3. Decide your position
Evaluate the current market conditions surrounding
your chosen asset and determine whether the price is
more likely to rise or fall. If your insight is correct on
the expiration date, your payoff is the settlement value
of your contract. The return rate on each winning
trade is established by the broker and made known
ahead of time.
4. Learn how a contract price is
The price of a binary options contract is roughly equal
to the market's perception of the probability of the
event happening. For example, if a contract has a
settlement value of $100 and the last trade of the
contract was $96.00, it is an indicator that
approximately 96% of the market believes that the
event is going to happen and the contract will end up
5. Learn the advantages of trading binary
options over traditional options.
Binary options are generally simpler to trade because they
require only a sense of direction of the price movement of
the underlying asset, whereas traditional options require a
sense of both direction and magnitude of the price
movement. No actual assets are ever bought or sold, so the
selling of shares and stop-losses are not part of the process.
Binary options always have a controlled risk-to-reward
ratio, meaning the risk and reward are pre-determined at
the time the contract is acquired. Traditional options have
no defined boundaries of risk and reward and therefore the
gains and losses can be limitless.
6. Learn the advantages of trading binary
options over traditional options.
Binary options can involve the trading and hedging
strategies used in trading traditional options. Both
fundamental and technical analysis strategies can be
used to increase the accuracy of price movement
Unlike a traditional option, the payout amount is not
proportional to the amount by which the option ends
up in-the-money. As long as a binary option settles in-
the-money by even one tick, the winner receives the
entire fixed payoff amount.
7. Learn where binary options are
Binary options are enormously popular in Europe and
are extensively traded in major European exchanges,
like EUREX. In the United States there are a few places
where binary options can be traded:
The Chicago Board of Trade (CBOT) offers binary
options trading on the Target Fed Funds Rate. To trade
these contracts, traders must be members of the
exchange. Other investors must trade through a
member. The value of each contract is $1000.
8. Learn where binary options are
Nadex is a U.S.-regulated binary options exchange.
Nadex offers a range of expiration opportunities
(hourly, daily, weekly) that allow traders to take a
position based on market developments. The choice is
vast. Indeed, there are over 2,400 binary option
contracts each day. These range from popular currency
pairs (such as GBP/USD) to key commodities like gold
and oil. Members' funds are held in a segregated U.S.
bank account in accordance with CFTC regulations,
adding an extra layer of security.
9. Check the implicit transaction
costs of a binary option.
Binary options brokers do not charge any per-
trade fees, nor do they collect any
10. Understand the percentages.
What percentage of the time would you have to be
correct in order to profit from the binary option you
11. Know the terms.
How different are the terms (for instance, "strike
price") on one side of the trade compared to the
reverse side? If they are significantly different, the
buyer would be forced into the unusual position of
having to predict the magnitude as well as the
direction of a price movement.
12. Know the transaction costs ahead
It is extremely rare and difficult to outperform the
market consistently. That means that options traders
typically have to engage in many transactions in order
to wind up with a profitable position. Consequently, a
trader faces the possibility of high transaction costs
and lower profits.