What are binary options?

A binary option is a financial option in which the payoff is either some fixed monetary amount or nothing at all. Binary options have a premium, a strike price, and an expiration. Binary options are arguably a simpler way to trade than traditional options or currencies. With a binary option trade, the broker will pay out a percentage of the premium at risk if the conditions of the contract are met. Basically, you receive a predetermined fixed profit, regardless of how far the market moves beyond the strike price or met the conditions of the contract. Each broker has its own payout rate. Most brokers offer somewhere between 70% and 75% for the most basic option plays while there are those who offer as low at 65%. Various factors come into play when determining the percentage payout (a market that is relatively less volatile and an expiration time that is longer usually means a lower percentage payout, the broker’s “commission” is also factored into the payout rate)

  • The “premium” amount for the option is chosen by the trader (expiration time frames are much shorter)
  • The purchase price of an option is also called the “premium”
  • Binary options have an expiration range of less than a minute to a few days (Traditional options have an expiration range of a week to a couple of years)
  • The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options (FROs) (on the American Stock Exchange)
  • The most common binary option is a “high-low” option. High-low binary option is also called fixed-return option (the option has an expiry date/time and also what is called a strike price). If a trader wagers correctly on the market’s direction and the price at the time of expiry is on the correct side of the strike price, the trader is paid a fixed return regardless of how much the instrument moved. A trader who wagers incorrectly on the market’s direction loses her/his investment.

 

When can you trade binary options?

An “option” contract gives the holder the right to buy or sell an asset at a predetermined price within a certain period of time (or by an expiration date, the holder is not obligated to buy or sell at the predetermined price, he merely has the option to do so if he wishes to).

Although binary options are a global trade, not all assets will be available all the time. Financial assets constitute the basis of any Binary Options trade. There are a wide range of them available from commodities like gold and oil to stocks, with different time zones defining when markets are open, thus deciding when you can trade binary options:

  • The Foreign Exchange Currency Market (FOREX) – The Forex market is available for trading 24 hours a day, five and one-half days per week. However, just because you can trade the market any time of the day or night doesn’t necessarily mean that you should. Most successful day traders understand that more trades are successful if conducted when market activity is high and that it is best to avoid times when trading is light. . As the FOREX market isn’t limited by physical trading exchanges, this market has the most trading hours of all (if you are based in the Eastern Time zone, you are not restricted to these hours). The four major FOREX financial centres are Sydney, Tokyo, London & New York, but some brokers will also have Hamburg as an option
  • Stock markets – you can clearly trade in any market, but the US stock market leads to the best chance for price swings. The U.S. stock market trading hours are 8:30 A.M. to 4 P.M. EST, however, it is not uncommon to see price activity fall to very low levels from 12 P.M. to 1 P.M. EDT when traders break for lunch. Morning, before lunch, is when you’ll see the highest price activity
  • Stock indices (FTSE-100, DAX-30, Dow Jones, Nasdaq Composite, IBEX-35…) – Stock indices will be subject by the stock market hours. For example – any asset based on the DJIA and NYSE stock indices will be subject by the US Stock market
  • Commodities Trading (Gold, Silver, Oil, Cotton, Wheat, Platinum) – the price of these goods is affected daily by political and environmental factors and therefore fluctuations can be followed closely, if you’d like to learn more about trading binary options with explanations and guidance, have a look at our binary options course for up to date training and information.

Market Time Zone Opens
GMT
Closes
GMT
Frankfurt
Germany
Europe/Berlin 07:00 AM
06-March-2017
03:00 PM
06-March-2017
London
Great Britain
Europe/London 08:00 AM
06-March-2017
04:00 PM
06-March-2017
New York
United States
America/New_York 01:00 PM
06-March-2017
09:00 PM
06-March-2017
Sydney
Austrailia
Australia/Sydney 09:00 PM
05-March-2017
05:00 AM
06-March-2017
Tokyo
Japan
Asia/Tokyo 11:00 PM
05-March-2017
07:00 AM
06-March-2017

 

How does binary options trading work?

Binary options “are based on a simple ‘yes’ or ‘no’ proposition: If a customer believes the price of a commodity or currency will be above a certain price at a set time, he buys the binary option. If he believes it will be below that price, he sells the option.

There are two kinds of options: calls and puts:

  • A CALL option allows an investor/trader to BUY the underlying asset at a predetermined price (If an investor/trader expects the underlying asset to rise above the strike price before the contract expires, he would purchase a call option). The purchase price is also called the “premium,” and when buying options, the premium is the most you will risk or can possibly lose
  • A PUT option gives the buyer the right to SELL an asset at their chosen strike price ( he thinks the market price of an asset will drop below the strike price before the contract expires)

For example, you decide to trade USD/JPY with the assumption that price will rise after one hour ( current price is 114.0000, the broker’s payout is 79% on a one hour option contract with a target strike of 114.0000). You finally decide to buy a “call” (or “up”, ) option and risk a $100.00 premium.

Ending Scenarios After Entering a CALL Option Gain/Loss

Expiry price is above the strike price
(in-the-money)

$100.00 x 79% = $79
$100.00 + $79.00 = $179.00
You gain $179.00 on your account.
Expiry price is equal to or below the strike price
(out-of-the-money)
You lose your stake and your account declines by $100.00.

With a binary option trade, the binary broker will pay out a percentage of the premium at risk if the conditions of the contract are met. Basically, you receive a predetermined fixed profit, regardless of how far the market moves beyond the strike price or met the conditions of the contract. Each broker has its own payout rate. Most brokers offer somewhere between 70% and 75% for the most basic option plays while there are those who offer as low at 65%. Various factors come into play when determining the percentage payout (a market that is relatively less volatile and an expiration time that is longer usually means a lower percentage payout, the broker’s “commission” is also factored into the payout rate)

Second exampe: Will the price of oil be above $55 at 1:30 p.m. today? If you believe it will be, you buy the binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price. The above binary may be trading at $43 (bid) and $45 (offer) at 1 p.m. If you buy the binary option right then you will pay $45, if you decide to sell right then you’ll sell at $43. If at 1:30 p.m. the the price of oil is above $55, your option expires and it becomes worth $100. You make a profit of $100 – $45 = $55 (less fees). But if the price of oil is below $55 at 1:30 p.m., the option expires at $0. Therefore you lose the $45 invested.

How do binary options brokers make money?

Binary options brokers make money through a variety of ways (the precise method is dependent on the business model of the broker):

  • Pricing Of the Binary Options – the pricing of the binary options is marked up slightly from those in the market. When we want to trade in binary options, we check out the prices of the asset displayed on the trading platform together with the expected payout in dollars and cents. If we pay closer attention, the expected payout is not calculated based on a true percentage payout. A certain portion of the payout is actually retained by the broker and this is the commission that the binary options broker is earning. Each broker has its own payout rate. Most brokers offer somewhere between 70% and 75% for the most basic option plays while there are those who offer as low at 65%. Various factors come into play when determining the percentage payout (a market that is relatively less volatile and an expiration time that is longer usually means a lower percentage payout, the broker’s “commission” is also factored into the payout rate)
  • Trading Activities are another way for binary options broker to make money. For example – broker has 1000 clients, 500 of these clients wish to bet that the EUR/USD will go up within the hour and they bet $100 each (500 wish to bet $100 each that the EUR/USD will fall within the hour, total money pooled in the market is $100,000). The EUR/USD displayed a paid out ratio of 80% on the trading Platform, and after an hour, the EUR/USD actually ended up (the 500 of traders that bet for the EUR/USD to rise ended up in the money with $180 each, for other 500 return is zero). The total payout comes to $90,000 and broker make rest of the money ($100,000 – $90,000 = $10,000).

 

What are binary options Signals?

Binary Options Signals are currency, commodity or stock market trade alerts, supplied by “professional traders” with the aim of assisting in the choice of how and when to trade. I marked professional traders with (“) for the reason, because there are lots of Binary Options Signals providers who are not good in this (not all are trustworthy or reliable). I will recommend everybody to invest a lot of time and energy into researching and gaining knowledge of the market before using binary options signals. Signals are sent in the real time either by email, text message alert or via a website. According to some Binary Options Signals providers, even traders who have very little or even no experience in the market are able to understand these signals as they simply indicate either “up” or “down” and can therefore easily be copied. It is very important to remember that signals do expire after a specific time frame ( or chart pattern), for example – a short term signal will expire at the end of a given period (or at the end of specific situation in the market) which could be as short as 60 seconds or five minutes or as long as thirty minutes (a daily signal has longer time period). I agree that even the most inexperienced trader can use this expert analysis to make a successful trade ( but only if they find experienced and professional binary options signals provider). According to some analysts night time is the best time to make use of binary options signals, but this is not a rule. There are lots of types of binary trading signals : Live trading signals, manual (signal is sent manually instead of via an analytical program), SMS, Copy Trading Signals, Autotrading.

How do binary options signals work?

Binary Options Signals are currency, commodity or stock market trade alerts, supplied by providers with the aim of assisting in the choice of how and when to trade. There are lots of types of binary trading signals, most common are:

  • Live trading signals (watching a live video of a trading session)
  • Manual (signal is sent manually instead of via an analytical program)
  • SMS
  • Copy Trading Signals (allows traders to copy the signals of proven traders in order to capitalise on the market)
  • Autotrading (This type of signal uses computer software to automatically place trades on the trader’s behalf)

Binary Options Signals are helping to spot trends and patterns of behaviour in the market. Signals are sent in the real time either by email, text message alert or via a website. Providers of Binary Options signals use software that has been programmed to spot these trends and to report them, for example – this software will spot every “bullish” pattern (pennant, flag, rectangle, cup with handle..) on 15 min EUR/USD chart and trader will receive alert. It is very important to remember that signals do expire after a specific time frame ( or chart pattern), for example – a short term signal will expire at the end of a given period (or at the end of specific situation in the market) which could be as short as 60 seconds or five minutes or as long as thirty minutes (a daily signal has longer time period). I will recommend everybody to invest a lot of time and energy into researching and gaining knowledge of the market before using binary options signals (free providers are great for those who want to learn more about reading the market and understanding how to select the best assets).

Binary options signals can help traders to find profitable trading opportunities, simplify their trading, and trade more profitable.  For example –  GBP/USD, CALL, 1 HOUR.

  • It is a CALL signal, meaning that your signal provider predicts the GBP/USD to trade higher one hour from now. The opposite of a call signal is a PUT signal, which predicts that prices will fall
  • 1 HOUR indicates the time span for which the signal is valid. That means, if you receive the signal at 1 PM, your signal provider predicts that the asset will trade higher than at this time at 2 PM

 

Are binary options legal in the USA?

Binary options trading is legal in the US and US resident can trade binary options without having to run into any legal problems. Binary options trading is very popular in the US, but the interesting thing is that the country has binary options laws and regulations (for years, traders in US have had no local brokers to turn to, the only option was to use overseas binary options brokers that accept USA traders). The problem is there is no way you can be completely safe by using an offshore binary options broker as a US trader. My recommendation for the US residents is to use only US-licensed binary options companies to be safe. The CFTC and the SEC have the authority to award licenses to suitable binary options operators (this operators are safe, secure, and offer financial services that are permissible under the US law).

US has a licensed binary options operator “NADEX”, and NADEX has been given the mandate and actual US binary license to offer binary options trading in the country. Binary options are legal and available to trade in the US only on a CFTC-regulated United States exchange. NADEX is designated by the Commodity Futures Trading Commission as a Designated Contract Market and Derivatives Clearing Organization. The CFTC is a US government agency overseeing futures, options and swaps trading. Its mission is to protect market users and the public from fraud, manipulation, abuse, and systemic risk.NADEX has to segregate client and company funds and because of this client funds are also very safe and secure (the quality of services are very good). I will recommend everybody to invest a lot of time and energy into researching and gaining knowledge of the market before using any operator (free providers are great for those who want to learn more about reading the market and understanding how to select the best assets). NADEX is offering demo trading before using real money and traders can enjoy bonuses when they join this company. Residents in US can rest assured that the US law will be on their side in case the company does anything unprofessional in its dealings with them. This is no situation with offshore companies and there is no way you can be completely safe by using an offshore binary options broker as a US trader. Some online binary option providers may not be properly registered and regulated. They are based outside the US, operate outside US law, and may hold member funds in various types of offshore accounts. They cannot legally offer binary options to retail customers in the United States.

Are binary options legal in Canada?

Today in 2017 Canadians are not allowed to trade binary options as a financial instrument, Canadian authorities currently treat the binary options trading as gambling and not as a financial instrument. This however does not mean that binary investing is illegal in the country. Canada currently has the Canadian Securities Administrators (CSA) agency, which was formed by securities regulators of all ten provinces and three territories (provinces have their own financial regulations). Companies that offer binary options to Canadians are regulated as legal gambling and not as securities trading. Canadian law doesn’t reference binary options directly but the Canadian securities authorities note that no binary options brokers are licensed or regulated to offer their services to Canadians. Previously, offshore  binary options brokers were regulated in fairly reputable jurisdictions like Cyprus or Japan and offered their services from there to Canadians, but that was stopped in 2015 and 2016.

Companies in places like Belize, British Virgin Islands, St. Vincent & Grenadines  have been halted from the Canadian market. In this case the halt was probably less of a legality issue and more of a payment issue (when Visa and Mastercard stopped payments from going through they had no easy way to acquire customers). If binary options continues to be offered in the future, analysts expect it will be under the label of gambling. There are no real legal Canadian binary options brokers because there are no financial trading laws in the country. However, traders can still consider websites legal if they are licensed in other reputable countries. At this moment it can’t be said for sure if Canada will decide to regulate this, great choices for Canadian binary options traders are brokers that are licensed in the United States or Europe.

Are binary options taxable?

This will vary with the different tax laws of each individual country or region. Tax regulations differ from nation to nation, the broker agents will certainly stick to the actual tax regulations within their home countries and don’t need factoring in unless of course their investors reside in the same country. The precise tax liability depends upon just how much you generate and lose throughout the year. In addition, traders might not even be asked to pay taxes if their earnings are below a set amount that differs by region/country. Every binary options trader will be required to determine the type of tax laws that are present in their home country or region in order to verify whether their profits accrued from trading binary options are taxable. The trader does not require to factor in the tax laws of the location of the binary options broker, unless the trader resides in the same location. For example, Cyprus is home to quite a number of major binary options brokers, and as such have its own tax laws that brokers need to comply with. Any client that does not reside in Cyprus will inquire advice on his home country’s tax laws.

In the US, taxation is taking place on both state and federal level. In the UK, binary options profits being tagged as being a part of more than one varying form of income ( a tax adviser is able to advise the trader on how to report his earnings while offering the lowest tax rates). I will recommend every binary options trader to visit the government’s tax website (in his country) to look at some of the FAQ there.