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If you have learned about option trading and do not know anything about binary option trading, then you have missed on a big part of options trading. Many investors have been trading in options but still do not know much about binary options. For traders not willing to get stuck in investments that have a long expirations period or long holding time like in stocks, mutual funds, bonds, futures, etc, binary option trading is a hot market currently.
As implied by the name, binary option means bi-polar. It is like a two way choice - to do or not to do; go along the 'up' or the 'down' side. In the trading market, binary stands for the up or the down movements of the currency, index or stocks. In these options the pay out is either all or nothing. For this reason binary option trading is much simpler to understand and perform than the normal option trading.
In binary option trading, an investor will take any available security to do his trade and then decide the amount he would invest in it. Once he has invested the money, the trader has to select the direction in which the security might move in the market. If the investor feels the prices will move up then he must buy the binary option contract to recover the total value of the contract. In case he predicts a fall in the prices, he must cell the contract to get full value. All types of securities cannot be traded in binary contracts; only those with the highest volume can be traded using this strategy.
The profit, one can make on binary option does not depend on how much the security moves but on the direction in which it moves. At the end of expiration, the pay out will be the same, even if the security shows a jump of ten dollars or 20 dollars. Let us understand the working of the binary options with an illustration. Say for example, if you invest hundred dollars in a security and make a binary option contract of fifty percent pay out value for an upward movement of security, then you will make hundred fifty dollars if the security shows a jump of even a cent at the expiration time. Similarly, if you had traded the binary option contract for a dip in the prices and the security would have actually shown a dip, then also you would have earned a profit equal to the pay out.
Binary options were first traded in Europe and became extremely popular. They are traded extensively in the key European exchanges like the EUREX. Due to its advantages and popularity in Europe, this type of trading has also moved to few parts of United States. Binary options are a fast paced, low cost means of trading. They also have a high return potential. Binary option trades are done on an hourly bases and due to their simple up and down structure; they can be easily understood even by the beginners.
