Binary options simply provides only two possibilities of payoffs to the investor – Yes or No. On the maturity date, if the asset is trading above a price designated at the time of contract agreement, the payoff is made to the trader else nothing at all. This simplicity makes them one of the most popular and lucrative options for new as well as existing traders. Binary options are also commonly known as digital options or Fixed return options (FROs).
Binary options can be broadly classified into two major types – 1) Cash-or-nothing options 2) Asset-or-nothing options. In Cash-or-nothing option, the investor receives pre-fixed amount of money if the option expires in-the money or receives nothing otherwise. In Asset-or-nothing option, the trader gets the value of underlying security if the option expires with positive outcome or receives nothing at all.
Binary options has two investment options, namely ‘call’ and ‘put’. When the trader makes an investment predicating that the prices will see an increment, it is a ‘call’, while if he invests predicting a decrement in value it is referred as ‘put’.
Investors generally find binary options trading as quite favourable because unlike other trading methods it only needs prediction regarding the occurrence of the event. Generally it is traded on the platform set up by SEC following their regulations. Currently, it also occurs outside of regulation boundaries over the internet. This increases the risk of market fraud and make the traders more vulnerable to them.
Binary Options trading seems easy money maker but the initial look can be deceiving. There are lot of frauds in the market looking to pawn the newcomers. So, be careful and understand the details carefully before investing.