Binary options trading is named so because in this type of trading, there can only be two outcomes; profit or loss. It is a quick, 'all or nothing' type of trade, very simple to understand and easy to manage. If a trader uses good binary options strategies, the chances of him getting a good profit are very high.
If a trader thinks that the value of a share will rise, he 'calls', and if he thinks that it will fall, he 'puts'. Let us understand the procedure of binary trading by taking an example. Let us assume, if a trader thinks that the value of a share of Apple Inc. will rise, and end up at $ 575 at 1400 hours on a certain day, he 'puts' and risks $ 100 for this trade. Now, if the value reaches, or crosses the $ 575 mark, he will win $ 100, that is, he will get $ 200 in return. But if it falls short of the $ 575 mark, he will lose his money. This is the main concept of binary business.
The deadline time (1400 hours in the above case) is called the 'expiration date' or 'maturity date'. The value which a trader predicts for a stock to rise above ($ 575 in the above example) is called the 'strike price'. The largest advantage of binary business is that, a trader only puts that amount to risk, which he can afford to lose. In the above instance, the trader does not lose more than $ 100.
Binary Trading through Binary Options Brokers
In most cases, traders execute binary business through a trading company and brokers. Such companies give traders a payoff, if the value terminates the strike price, which ranges from 70% to 90%. For example, if a binary business firm offers a payoff of 70%, the trader will get $ 170 from his investment of $ 100. But if the trader loses, he gets a small rebate (10% in most cases).
In binary trading, the amount to which the value of the share increases nothing. The trader will get the same amount if it closes exactly on the strike value, or $ 10 above it.
Types of Binary Options Trading
There are two types of binary options; asset or nothing binary option and cash or nothing binary option. The case given above is an example of the cash or nothing binary trading option.
In asset or nothing binary trading option, the trader gets the value, which is equal to the price of the share, if he wins. But if he loses, he loses the amount which he put on risk.