What are Binary Options
Unlike regular stock options where you buy the right to buy or sell a stock at a set price before an expiration date, binary options offer an ‘either or’ proposition: either you get the asset when the date strikes or you don’t get anything at all.
Binary options are named the way they are since there are only two possible outcomes. Binary means having properties that involve two items. You can buy binary options that pay off either in cash or in assets.
Unlike regular stock options where your gain or loss depends on when you choose to exercise and how much the underlying stock has gone up or down in value, binary options look to be much simpler: it’s a black-and-white bet.
Either the option trades ‘in the money’ or trades ‘out of the money.’ A binary option is viewed as having traded ‘in the money’ when the underlying stock for the option hits the target price for the binary option or hits a higher price.
If, however, the underlying stock trades below the target price when the option’s expiration date arrives, the trade is viewed as having traded ‘out of the money.’ What makes this type of option different from regular options is that the investor is guaranteed a specific amount if the option play trades in the money.
The investor gets nothing if the option trades out of the money. Simple enough, right? This is precisely why binary option is catching on among online traders. Unlike traditional options, there is no guess work involved; no waiting and hoping for incremental moves so you can cash in for bigger gains.
Before you start trading binary options, you need to make sure that you are investing and not gambling. Critics of this type of financial investment say that its process is not much different from betting red or black at the roulette table. While that criticism is unfairly simplistic, there is a grain of truth to it. In traditional options, there is a lot of room for strategic finessing. In binary options, it is strictly an either or proposition. Be that as it may, don’t let the simplicity of binary trades get the better of you. You still need to pick the right underlying stock for you to make money in binary options. This is where the critics are wrong.
Unlike simply betting on red or black, the ability to pick underlying securities allows you to profit from solid research and industry trends or technical analysis. Pick stocks that have a higher chance of appreciating past the target price for your binary option. You have to employ standard stock picking skills so you can forecast the way a stock will move by the expiration date. There is still a lot of chance involved but this isn’t gambling. Whenever investors can use research to offset ‘luck’, the investment vehicle is less of a gamble and more of a traditional investment play.
One of the most important decisions you’ll need to make however before you start trading binary options is which broker to choose. We’ve taken some of the leading binary options brokers here and provided some insight on the benefits and drawbacks of each of them, with the hopes of helping you find the right broker for you. Be sure to take a look at the binary options broker reviews.
How to Choose the Right Binary Options Broker in Kenya
One of the biggest and most important decisions you need to make If plan on trading binary options is which broker you choose. This decision should not be made lightly, as there are many brokers out there, some better than others. Some could even be considered actually to be downright fraudulent.
The binary option broker will provide you with a trading platform which will enable you to actually trade the options. The quality of the software involved is important as it should have zero tolerance for mistakes.
Any stock quotes or graphs should be as accurate as possible, no matter what the status of your option is. There have been reports of binary options brokers for example that slightly skew stock results upon expiration so as to tilt the option in their favor so they don’t have to pay the winning expiration reward.
The input speed of the software should also be as fast as possible. If you see a huge gap down in a stock price and want to take advantage of it before it recovers, you don’t want the software slowing you down.
If you click to buy a call at the current price, you don’t want to sit there for a minute waiting for confirmation, only to discover that you’ve already missed the boat and didn’t buy at the price you were looking for. You also of course don’t want your broker to suffer from slippage.
For the most part, a few companies have invested millions of dollars in developing and perfecting a trading platform which is both secure, accurate, and easy to use. Many other smaller brokers, which cannot afford to develop these platforms themselves, simply license the platforms from the larger brokers, tweaking them a bit and spicing them up with a few of their own quirks.
So, what should you look for when assessing a binary options trading platform? We’ll go over some of the key points you should look out for when testing a platform. These criteria are actually the same that we use when we review brokers and publish here.
If you’re going to shell out your credit card information to this broker, and trust them to keep safe not only the money that you deposit, but also any winnings you might have in the future, security is a key factor.
Be sure that secure pages have proper SSL encryption and use proper https web protocol. These pages include of course account login pages, and any page that requires you to enter any financial or personal information.
It wouldn’t hurt to even ask customer service if they are insured in case anyone hacks into their systems, and what fail-safes they have in place in case something like this happens.
If you’re going to be trading alot, it’s really easy to lose track of how many trades you’ve done and where you stand in terms of profits and losses. It is important to work with a broker that can provide you with detailed reports on where you stand and how much you’ve won and lost on each trade. The ability to keep track of these things can also help analyze your strategy and better understand what your strengths and weaknesses are, and can of course minimize unnecessary losses. Needless to say, keeping track of this can also help you verify that the broker isn’t slipping in any hidden fees or commissions.
Being as binary options are a win/lose asset, it is crucial that the options broker provide you with the most accurate quotes and quote records available. Altering the quote by a mere cent can be the difference between your option expiring in the money or out of the money, meaning literally hundreds of dollars. Not only should the quotes be accurate, but the brokers should also offer minimal slippage when placing an order. Slippage is the effect caused due to the lag between the time you want to initiate your order and your order being processed and accepted.For example, let’s say you want to put in a call order for a binary option at $11.50. If you need to wait a few seconds to get the order accepted and the stock moves in this time, your call order may eventually be put in at a higher amount – let’s say $11.70. Now, if the stock lands at $11.60 upon expiration, you would be out of the money simply because the slippage caused your strike price to be higher than it should have been.
Binary options trading is all about one thing: making money. These options offer fixed gains if you succeed in expiring your option “in the money”. Different brokers offer different winning odds, depending on their own calculations. These can be anywhere from 40% up to 85%. Obviously, you’ll want to work with a broker that can give you consistent high gains for successful trades. Typically if your option expires out of the money, you lose your entire investment on that trade. However, some brokers offer as an additional bonus up to 15% rebate even on unsuccessful trades. We usually present the normalized profitability, which is Profit + Rebate.
As with everything in real life, there will always be glitches and small problems that need to be solved. No matter what the broker, there will always be a time when you will need the help of customer support.
Binary options brokers are not measured only on the sales support before you invest the money, but also on customer service after you’ve already signed up and become one of their customers. A good binary options broker will have customers from all over the world and will need to have staff available 24/7 in order to give quick assistance to any problems that may occur, be it via email, chat or even telephone.
All brokers offer trading of standard binary options on various securities. They’re usually the same securities – previous metals, forex, high volume stocks (Microsoft, Facebook, Google etc.).
However, they also usually try to differentiate themselves from the pack by offering unique option types and features. These features can be quite appealing and often can be enough to make them more worthwhile than the others. It would be worthwhile looking into these features as well when deciding on a binary options broker.
People trade Binary Options for one reason and one reason alone – to make money. You could make millions of dollars trading binary options. However, all that money wouldn’t be worth a thing if your broker didn’t let you withdraw. Be sure that you broker doesn’t have any hidden clauses that could make withdrawing your winnings a complete nightmare.
The Good (and the bad) on binary options
Great profit potential
Binary options offer the potential to earn very high profits in a very short time frame. Depending on the type of option you purchase, and your broker of course, binary options can return anywhere between 70% and 650% on your investment.
Short Time Frame
Compared to other trading securities, binary options are very short term. With some options offering up to 80% payouts within expiry times as short as 60 seconds. For the less anxious and more patient, there are of course longer options available from hours to months.
Fixed and predetermined gains
No matter if your option ends up in the money or out of the money, you always know exactly how much you stand to win or lose on any particular position. Unlike stocks or forex, where your gains and losses constantly change, with binary options you always know what you stand to win or lose, making risk assessment that much easier. Your losses are also better managed as you cannot lose more than you invest. Unlike stocks and forex, you never trade on margin with binaries, so your account can also never go negative.
Binary options are easier to understand and trade than regular stocks and stock options. The interface is always very intuitive. Unlike forex and stock trading where you usually need to learn how to operate very complicated and elaborate software. This makes it an ideal tool for beginners as well as professionals.
Binary options brokers generally do not charge commissions for trades. This is significant when you want to perform a large number of trades and makes it possible to perform smaller trades without thinking about the costs of commission. Some binary options brokers allow trades as small as $5. This would of course not be feasible with stock trading where often the minimum commission is in itself anywhere between $5 and $12.
Low Minimum Investments
Because of the non existent commissions of binary options, it really helps that most brokers have a very small minimum investment requirement. That means you can invest as low as $20 sometimes. This is great for new traders who want to start small and learn the ropes before digging deep into their pockets. You also know that the most you can lost is your initial invetment. This means that if you start small at $20 for example, you stand to lose only up to those $20, unlike stock trading where using margin can cause you to lose more than you even have in your trading account.
Large Potential Losses
As stated before. If you miss on your prediction with binary options, you stand to lose your entire investment. On the other hand, the amounts you need to invest in order to achieve good returns are much lower than those of stocks or stock options, evening out the potential losses and not making it much more than those.
As with all stock market related trading, there is no such thing as a sure thing. You are going to make mistakes and lose money. The key is to find a system that works for you so you win more than you lose. Understanding this is possibly the first step to success with binary options trading.
Not all assets are listed
There are over ten thousand stocks and stock options listed in the NASDAQ, AMEX and NYSE combined. With binary options you can only trade a fraction of them, limiting the flexibility by a great deal. The plus side is that this will allow you to familiarize yourself with a small number of good stocks, all of which have very high trading volume, making their movements somewhat easier to predict.
Some sketchy brokers
Just like with regular stocks and stock options, you need to do your homework before choosing your binary options broker. There are a number of very good and trusted brokers, but there are just as many sketchy ones. This is key if you plan to succeed.