Binary options offer traders the opportunity to make a pure play on economics. The most successful binary options traders leverage their overall business instincts regarding world-wide or industry-wide economic conditions in chosen niches.
These traders rely on their judgment about whether a particular underlying currency or other asset class or economic sector will rise or fall in value before a particular expiration date… Then they buy or sell according to the anticipated direction of the market.
If a trader believes that the price of the underlying asset will rise, then he or she buys the subject binary option. Or, if the trader thinks the price will fall, they sell.
An example of a binary option trade
For purposes of the following example of how a binary option trade works, let’s assume that a trader in the Euro-Dollar (EUR/USD) market is watching the market moving above 1.3500 on a particular day.
He or she believes that the EUR/USD pair will continue to rise. So, after researching the available options, the trader buys ten 1.4000 call options at $35 each for a total investment of $350, in the belief that the EUR/USD price will close at or above the strike price of 1.4000 at 4:00 p.m. that afternoon.
Likewise, if the trader believes that the price of the underlying asset will fall, then he or she could buy a put option as a play on the anticipated downward price movement.
Continuing in the current example, let’s assume that at 3:00 p.m. the trader buys those 1.4000 call options when the underlying EUR/USD price is 1.3900 and therefore the value of the option will increase as it nears the strike price.
At the 4:00 p.m. expiry, let’s assume the EUR/USD price is at 1.4100. So, in this example the trader earns a gross profit of $100 x 10 options = $1000, with a resulting $650 net profit. In the case of a losing trade the loss would have been limited to the cost of the options alone, in this case $350.
Of course, the trader is free to liquidate the option holding at a significant profit before expiry, when the price reaches then rises above its strike price.
How to get started
The last article received a lot of comments from traders sharing their experiences with bad binary brokers. Has anyone had a positive experience?
If you’re looking to get started, my best advice is to start with a very small account. View it as an education so if you have a bad experience, at least you’ve learned something.