What is options trading - What is a binary option?

What is options trading - What is a binary option?

Binary options are at the center of constant debate when it comes to different types of investments or assets. It's no surprise - investing through binary options feel very much like gambling and is easily subject to scams. But why?

There are multiple aspects to binary options.

 However, it is not recommended to trade them due to their gambling nature.

There are several interpretations and arguments on binary options. In this article, for you to get a clearer picture, we are going to give you our interpretation of this type of investment.

The goal is to define binary options, compare them to "regular" options, and to give you all the details necessary to understand this product. We'd like to introduce you to binary options while warning you about the risks of investing in them.

What is a binary option?
Definition of binary options

Binary options are financial instruments that simplify the trading of an underlying asset or market by turning trading into a bet-like experience. Basically, to a YES/NO question.

For example, you have to guess/bet on whether the price of an underlying will be over or under a certain strike price after a certain time. If you think it'll be over, you'd pick YES - aka, you pick "buy". If you think the underlying asset or market will not meet the strike price, you'd pick NO - "sell" in this sense. For the most part, users can bet on Forex, Stock Indices, Commodities. These options are priced between $0 and $100.

The expiration dates of a bet vary from minutes to weeks, it depends on the trader.

As you see, this is a speculative genre - you only speculate on the price movements, but don't actually own anything. Trading is not that easy so that it can be narrowed down to a simple question of whether an asset will be over or above a certain price at a certain time.

What is a binary option?
Availability in the US, and EU

In the United States, trading binary options is legal and are regulated by the Commodity Futures Trading Commission (CFTC). Whereas in the European Union, it is outright banned by either local regulators (like the Financial Conduct Authority) or the European Securities and Market Authority (ESMA).

Binary options are also banned by the Australian Securities and Investments Commission (ASIC).

What is a binary option?
Regulatory body: the Commodity Futures Trading Commission (CFTC)

The Commodity Futures Trading Commission is a US government agency that oversees most derivatives markets in the US and is responsible for protecting market participants from fraud, scam or manipulation.

What is a binary option?
Safety, purpose and alternatives of binary options trading platforms

Safety is a key concern when it comes to all investments, especially binary options.

How safe are binary options?

The problem is that risk assessment or risk management is more or less impossible with binary options. This is due to the fact that you are effectively betting on movement that may or may not be manipulated or fraudulent on a platform for a certain timeframe. Therefore, traders can't manage their positions.

 

To expand on all aspects Sam Dogen from Financial Samurai has also provided us with some insights about:

  • purpose of binary options
  • and what the alternatives for binary options are

 

What is the purpose of binary options? Isn't it close to gambling?

"Binary options offer a viable alternative when speculating or hedging, but only if the trader fully understands the two potential and opposing outcomes. If you don't understand binary options, I wouldn't trade them. And if you are to invest in binary options, start small."

 What are good, safer alternatives for binary options?

"A safer alternative to binary options is investing in a plain vanilla structured note, with downside protection and upside participation. But my favorite is investing in real assets, like real estate crowdfunding because it is less volatile, holds its value better, and generates income."

What is a binary option?
Where to look for more?

Author of this article

Bence András Rózsa

Author of this article

Bence András Rózsa is an experienced broker analyst. Having an MSc in international economy and finance, he focuses on equities, cryptos and newcomer financial services. He also has 2+ years of experience within the brokerage industry specializing in stock- and CFD/forex brokers, crypto providers and robo-advisors.

Bence András Rózsa

Broker Analyst

Bence András Rózsa is an experienced broker analyst. Having an MSc in international economy and finance, he focuses on equities, cryptos and newcomer financial services. He also has 2+ years of experience within the brokerage industry specializing in stock- and CFD/forex brokers, crypto providers and robo-advisors.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology

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