Binary options have taken off in popularity. The accessibility and low upfront cost has made them a favorite of day traders everywhere.
Though with this popularity has also come controversy. Mentioning binary options to your finance friends might cause some questioning glances.
The fact of the matter is people see binary options as speculation. They’re not technically wrong, but there’s so much more to binary options trading.
If you understand binary options 101 you’ll know that the trading is much deeper than “betting.”
There are markets to understand, and payout ratios to monitor. Let’s take a look at how to make the smart decisions when you trade binary options.
Binary Options 101: The Basics
Before we get into proper decision making, we’re quickly running through how binary options trading works.
Binary options are investment vehicles where investors take a position on the direction of some market or underlying asset.
The assets range from stock, to currency values, etc.
The position you take revolves around what is know as the “strike price,” or the asset’s value at some point in time.
Investors either “call” the option, meaning they believe the price will rise, or “put” the options, meaning they feel the price will fall.
All betting occurs over a specific period of time (ex: 2 hours). Payout happens, usually in fixed ratios, after the time period expires.
If your prediction came true then you’ll retain your investment and make additional money.
Making the correct prediction, however, breaks down into two main parts.
Follow The Markets
Binary options trading can happen in almost any major fluctuating market.
If prices and rise and fall, people can trade options.
When people deem binary options speculation, one has to look no further than what’s actually being traded.
Take stock markets, for example. People invest in company stock based on their predictions and knowledge of how the company is expected to perform.
Smart binary traders work the same way. If you’re trading options of currency, you should follow international economic growth and contraction.
The major market fluctuations of each country can help determine whether a currency will rise or fall.
The same holds true for any other market. Smart trading involves following markets to speculate on their highs and lows.
Each binary options trade has a rate of return, or how much money you stand to make or lose.
Binary options 101 says to only take trades that will make you money. Obviously, this oversimplification isn’t possible.
Smart traders make trades that offer favorable return rates based on their prior knowledge of the asset market.
Let’s say you’re trading based on if Google stock will rise or fall. A few brokers have offered you rates, say 50:10 and 100:0.
You know that Google released the Pixel and it’s doing well, so that stock will probably rise.
The best call bet would then be the 100:0 return. If Google’s stock did rise (and you know it probably will) you’ll double your money.
Calling the 50:10 bet means you’d only make your money back, plus half. However if Google stock dropped, you’d 90 percent, but retain 10.
The idea is to always run a cost-benefit comparing rate of return versus your market knowledge.
Binary options trading has the potential to make real money, so long as you’re making smart trades.
Know your markets and use them to choose the return rates that payout the best versus the odds.
You won’t clean up on binary options tomorrow, but put in the work and there’s lots of money to go around.