Binary option trading is a process that allows investors to make predictions on whether an underlying asset will reach a specific market price on a given date. Investors that accurately determine the asset movement are paid a fixed amount but receive nothing when incorrect. Although risk is considerably lower using this method when compared to traditional trading techniques, the investor should still carefully assess current market conditions and prices in order to make an informed decision. This will help to weigh the balance between acceptable reward and risk.
The biggest difference between normal and binary option trading is that a binary option will pay off regardless of the difference between the strike price and the actual value of the asset. A put option is a situation in which the trader determines that the value will fall instead of rise. Normal call options can be extremely valuable if the asset experiences a rise well above expected levels. With a digital option it doesn’t matter how far the asset falls or rises; the payoff amount remains the same.
There are actually several different binary option categories and the category chosen can make a large difference in the trading process. American-style options tend to be more flexible as there isn’t a specified time by which they must be applied. Conversely, a European-style option is exercised precisely at an exact date. The majority of binary options trading are European-style regardless of the investor’s location. Binary options can be configured to pay off in the form of assets or cash.
Most experienced binary options traders use a complex formula to determine option values. Sometimes they utilize software applications that are programmed to carefully monitor market trends and price movements. Other investors rely on their own knowledge and past experience to predict whether certain options will move up or down. Despite the lesser amount of risk involved in binary options trading, a new or inexperienced trader can quickly become empty-handed if the assets don’t reach expected prices. It’s important that the investor has a clear understanding of potential market volatility when trading digital options.
As with any of form of options trading, investors need to address two important issues. The most important is determining the likelihood of an option paying off. The second concerns the cost of the binary option. It’s essential to remember that the price paid to purchase the option has a direct impact on the amount the investor receives on a successful trade. This is because that unlike normal options trading a binary option is sold at a fixed price.