Everything changes…You might ask what’s the connection between that and Options and you would be entitled to do so, but to answer the question, I must tell you a little story: I started to trade Forex about five or six years ago. I went through the usual ups and downs, lost money in the beginning and then made it back. I’m not going to bore you with the details, but after I finally got my trading together and found my balance, I thought I would never trade something else. Well, that thought was short lived because my curiosity led me to Options. At first I just wanted to know what they’re about, I wanted to compare them to Forex and see if I am able to achieve higher returns with lower risk, but soon I started to trade Options more than Forex.
Then the Binary Options craze hit the internet. All the slogans, all the stuff like “…binaries are easy and profitable” made me stay away at first, because I don’t consider that to be a good approach to financial instruments and trading in general. But curiosity struck again and got the better of me so I took a second, closer look at binary trading.
The Good, the Bad…the Binary
To put it simply, when trading Binary options you either lose the entire amount invested on a trade, or you win a fixed payout which usually ranges from 65% to 95% of your investment, depending on broker and underlying asset. This leads us to the first and major difference between Binaries and regular options: while trading regular options, the further price moves away from the strike price in our predicted direction, the more we profit, but when trading Binary Options, just one pip/point is all we need in order to win the entire payout. Assuming we have a regular option trade and at expiry time price is one pip/point above the strike price, we are not in a very happy situation, but if a Binary trade expires at the same point…well, we just made 65% to 95% profit on that trade.
On top of that, a Binary Option trade is not affected by the Greeks. Did you ever find yourself in a trade that lingered around the strike price and only started to move in your desired direction late in its “life span”? I know I did…and by that time, Theta ate all my potential profit. Not a beautiful scenario, but nonetheless, time decay is something that we need to take into consideration when trading regular options. However, the good news is that Binaries are not affected by Theta or any of the Greeks so in other words, even if in the last moments of my trade, price moves above/below the strike price, I still receive the entire payout.
Not everything is milk and honey in the Binary world and a drawback is the Risk to Reward ratio: I can lose 100% but I can only make 65% to 95%, depending on the broker I am trading with. Well, I know that in order to make a profit you have to either have a high win rate or a good Risk to Reward ratio…In Binary Options this ratio is not so good, but the fact that you just have to be right about the direction and not having to care about the distance traveled can help with the high win rate part. Also, some brokers offer a refund on Out of the Money options and this refund can go up to 15%, but not all brokers adopt this practice and 15% is seen rather rarely.
Wrapping it up
Once I got over my first urge to dismiss Binary Options due to the advertising and the hype created around them, I realized it’s a profitable instrument, much easier to trade than others. Some Forex traders, especially new comers find it difficult to calculate position sizes; some regular Options traders have difficulties understanding all the butterflies, iron condors, bull spreads, albatross spreads and especially the Greeks and how they can influence the profit of a trade.
None of the things mentioned above are a problem when trading Binary Options and to be honest, I am glad that my curiosity made me try them out. If you already are an experienced trader it will take you probably about 10 minutes to learn all about Binaries and although it will take longer for a newbie to understand it all, in my opinion, Binary options are one the most accessible trading instruments available at the moment.
This article is intended for informational and educational purposes only. In no way should it be viewed as endorcement from SteadyOptions to use binary options or one of the brokers.