In this article we'll go over binary options – what they are and how binary options trading works.
1. Binary options: introduction and terminology
Binary options are easy to understand since they operate under a relatively simple concept. That is probably why they became so popular in the recent years. The most simple implementation of binary options answers a question: "Will the asset price do up or down?". Therefore, a trader who wishes to open a deal has to choose from one of two types of options: Call or Put. If you think that the asset price will rise, you should buy a Call option, and if you think that the asset price will fall, you should buy a Put option. If you made the correct prediction, you receive a predetermined amount of profit (it may reach up to 100% on IQ Option platform). And if you made the wrong prediction, you lose the investment only – the rest of your deposit is safe.
However, do not be deceived by this simplicity. Can you earn money with binary options? Yes, absolutely. As was mentioned before, profits from a single deal can be quite big – oftentimes brokers offer anything from 60% to 85% of the initial investment as a profit, and you can even double your investment in a case of IQ Option. But to get prominent results, you need to take binary options trading seriously, apply analysis and utilise data-based approach in your trading.
Can you earn money with binary options? Absolutely, but you need to take binary options trading seriously.
Let's take a look at the binary options terminology:
- strike price
- expiration time
- investment amount
- type of the option (Higher and Lower, or Call and Put)
An asset is essentially what you place you deal on. The most common assets for binary options are currency pairs such as EUR/USD or USD/JPY. However, you can also trade binary options on stocks of publicly traded companies such as Facebook or Tesla, commodities such as gold or oil, or even cryptocurrencies such as bitcoin.
A strike price is a price that defines whether your option expires in the money (i.e. you will get profit) or out of money (i.e. you will not get profit). Usually, the strike price is the current asset price, also known as the spot price. However, that is not always the case. For example, IQ Option has a similar product that they call Digital Options that allows you to choose the strike price. The further the chosen strike price from the current (spot) price, the higher the profit – if the option expires in the money.
Profitability in binary options is always known before you place a deal. If your deal closes with a profit, you receive both the initial investment and the profit to your account balance. For example, if you buy a $10 option with 80% profitability and the option expires in your favor, you will receive $10 of your investment plus $8 of profit, totalling $18.
Expiration time is the time that defines when your deal closes, or expires. On IQ Option trading platform, it can range from one minute to one month. The general rule is that the lower expiration time is riskier but more profitable so you may find yourself comfortable with the ultrafast trading or making more long-term decisions. Once the option expires, you either receive your investment back with a profit or lose your investment.
Investment amount, or the option price, is the amount you enter the deal with. Different brokers offer different min and max amounts but the minimum was around 10 to 25 USD. That is, until IQ Option came along with the market-disrupting minimum investment amount of just $1. Since then, a lot of other brokers followed suit and lowered their minimums as well. Right now, on IQ Option you can buy an option with any amount from $1 to whopping $20,000.
2. Binary options trading interface
Trading binary options is super-intuitive and basically consists of setting the deal parameters and clicking (or tapping, since binary options can be easily traded on mobile devices as well) one of the two buttons to place a deal. Here's a quick demo for you to try out:
Ready to try binary options trading? Register a free IQ Option account and enjoy unlimited demo account. No credit card or deposit required.
Risk warning: Financial products offered by IQ Option include CFDs. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.