For the active trader in search of new investment opportunities, the simple structure of binary option trading may seem alluring; however, they are not without their own intricacies. With their ease of global marketplace tracking comes the burden of a separate payout, fee, and liquidity structure which do not match those of traditional options.
Investors in the U.S. will also need to mind that binary options traded there are structured differently than in other markets. Should the trader already be considering high-risk options and looking to speculate, these “exotic options” may make a worthwhile addition to one’s portfolio. Thorough research and due diligence is still required; in June 2013, the U.S. Securities and Exchange Commission issued a warning related to false investments after charging a Cyprus-based company with violating investment terms.
Despite the daunting classification of “exotic option,” binaries are relatively simple to understand and present a low barrier of entry to investment. Several varieties exist, but the one of interest to most investors is the “high-low” option. Starting with a selection of stocks, indices, commodities and foreign exchange, the investor must be confident in the performance of their portfolio before an expiration date underwriting the investment. At that time, a “strike price” on the option will trigger, with the trader given a fixed return if they wager correctly on the current market price being higher or lower than the strike price. Those who do not forecast properly will stand to lose their investment, so great care must be taken.
When placing the initial order, a trader will select either a “call” or “put” binary option. A call would be purchased if the traders believes the trade value will be above the strike price by the option’s expiration date with a put being for those investors who see the price falling below that mark. Beyond the U.S. market, the strike price is usually set to match the underlying commodity or index at the time of purchase, essentially leaving the trader to project the package’s price at time of expiration and to collect a fixed reward if correct
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