Unlike other options available for trading, the Binary Options in finance imply a payoff method, where you either received a fixed amount of an asset or nothing at all. Just as in computer jargon, the binary numbers 0 and 1 signify True Value or False Value, also interpreted as a win/loss situation. Similarly, the Binary Options simply provide two options, winning or losing a pre-fixed amount when you trade in them.

So what is Binary Option Trade all about? Well, in Binary Option trade, it is not only important to anticipate the quantum of increase or decrease that the underlying instrument is likely to experience, but it is equally important to correctly predict the general direction, whether up or down, in which the instrument is likely to move. Therefore, you can enter a “call option” if you predict a rise in the price of the underlying instrument. Conversely, you can enter a “put option” if you predict a fall in price of the underlying instrument.

Also, Binary Option has a contract price and an expiration date attached to it. In this trade, the price of the underlying instrument on the expiration date is compared to the underlying contract price to help determine if the price is higher or lower than the contract price.

It is also important to remember that not all instruments are available for Binary Option trading. To select a Binary Option trading instrument, check listed options in the exchange. Also, remember that Binary Options are always settled in cash and do not involve exchange of any instrument.

The benefits of trading via the Binary Option route are manifold. Let us begin by focusing on the advantages.

The first and most important advantage is that Binary Options are simple to understand and trade in. This is primarily due of the fact that the trader needs to understand and predict the general direction, either up or down, that the instrument will move in. If this prediction is accurate and precise, the trader can earn considerable money, often just by a single click.

In addition, anyone having even a limited knowledge of financial instruments can easily trade in Binary Options. The following example demonstrates why this is true: Let’s say you are a steel merchant knowledgeable about the way steel prices move. This knowledge is sufficient to make you a great Binary Options trader in the steel commodity, even though your knowledge may be restricted just to that single commodity.

A Binary Options trader is always protected against unlimited amounts of losses, as losses are restricted to the contract value of the commodity being traded in.

Not only this, but the Binary Options trade is available for a variety of maturity periods, providing you with a wide time frame in order to select your trading period. All you need to do is simply select the time period across which you are comfortable and confident of your prediction and begin trading.

Binary Options trade has a few limitations as well, which will be covered separately. More importantly, however, its advantages and benefits far outweigh its limitations.

Binary bets are basically fixed odds financial bets, which were originally pioneered by Xodds.com (which is now known as Betonmarkets.com) around the year 2001. IG Index then re-packaged the product as binary betting and gave the binary bets market a boost when it started to offer them in 2003.

Forex Binary Options trading is taking the digital options market by storm with its easy “up and down” fixed return options system that even the most inexperienced Binary Options trader can understand.

Let’s consider a short explanation about the Forex. The Forex, or Foreign Exchange Market, enables banks and other institutions to easily buy and sell foreign currencies. The main function of the Forex is to facilitate international trade and investment by helping businesses convert one currency to another. For example, it allows a European company to import products from Japan and pay in Yen even though the business’s income is in Euros. So you might be asking yourself, how does this relate to Binary Options trading?

Currencies on the Forex are floating currencies, which means that their exchange rates may fluctuate according to the Forex market. The value of a currency rises whenever the demand for that currency becomes greater than the available supply, and will drop when the demand is less than the available supply. This is where we get to Binary Options trading on the Forex. In very recent years, this new kind of digital options trading has become the leading investment choice for the average person who wants to participate in the Forex.

Binary Options trading, through an online Binary Options platform, offers traders the opportunity to call and put positions on major currency pairs such as the US Dollar against the Japanese Yen and the US Dollar against the Euro, among many others. With Binary Options, or fixed return options, you are forecasting whether one currency will trend up or down against another currency.

Online Binary Options platforms offer individual traders the chance to participate in the Forex, using lower capital amounts but with the same high-yield returns as any other trading method. Binary Options trading payout can be hourly, daily or monthly. Easy call and put Binary Options purchases are made with one simple click. You can open an online account and trade Binary Options for just $100.

Let’s take a look at how Binary Options trading on the Forex really works. You have $1,000 in your Binary Options trading account and you decide to trade digital options on the Forex currency pair EUR/USD. For this Binary Options example, we’ll assume that the price of the EUR/USD is at 1.43483. Some finance reporting you read about earlier in the day gives you the impression that that the Euro is climbing against the Dollar.

You decide to buy a $100 call option for the EUR/USD pair with a 1-hour expiration. If your prediction is correct and the price rises at the end of the hour, even if only by 0.001 above the price you purchased the call option for (also called the strike price), you would get as much as a 70% return on your $100 investment in Binary Options. So in the end, a mere $100 trade could easily earn you $70 in profits, and you could repeat the same Binary Options trade a few times in one day.

The most fascinating and beneficial thing about Forex Binary Options trading is that, unlike other forms of trading, you only have to anticipate the direction in which the currency will move, and even the tiniest shift in foreign exchange will grant you the expected returns. Like in the example above, you took home $70 for 0.001 points of variation.

Now that’s definitely a successful digital options trade that I’m sure you wouldn’t mind repeating. Plus you can call or put for as little as $30, and there is no commission on online Binary Options sites. Binary Options trading also offers a much more stable trade because you know what your fixed return options are in advance, and some online Binary Options platforms may offer a 15% return on digital options that expire out-of-the-money.

The Forex market is the only 24-hour market, opening Sunday 5:00 PM EST, and running continuously until Friday 5 PM EST. The Forex day begins with the opening of Sydney’s (Australia) Forex market at 5:00 PM EST (10:00 PM GMT / 22:00), and ends with the closing of New York’s market, a day after, at 5:00 PM EST (10:00 PM GMT / 22:00), immediately reopening in Sydney restart trading.

Note: EST is an abbreviation for Eastern Standard Time (e.g. New York), while GMT is an abbreviation for Greenwich Mean Time (e.g. London).

The primary Forex markets, in the order of their opening times, are: Sydney, Tokyo, Frankfurt, London and New York. On the chart below, you can see the hourly course of the Forex-trading day. 

Note: Tokyo’s market doesn’t start in the proper time zone due to the fact that it opens 1 hour after the other markets (9:00 AM Local Time, while others open at 8:00 AM Local Time).

The following table illustrates the opening and closing local times for a Forex day and week, in function of time zones.

* The closing time is same as the opening time, but refers here to the day after the opening.

If you live in New York you can see from the table (GMT-5) that daily trade starts at 5:00 PM (17:00), and ends at 5:00 PM (17:00) the day after. The weekly opening is on Sunday, while the weekly closing is Friday.

Familiarize yourself with your local opening and closing times, as this will impact when you must close your day trades.

For example, if you are living in London (GMT), the Forex day will end and restart at 10:00 PM (22:00). If you open a position at 9:30 PM (21:30), and close it at 10:30 AM (22:30), your trade goes from one to another Forex day and rollover/swap will apply. If you open a position at 10:30 PM (22:30), and close it next day at 11:00 AM (11:00), your trade is intraday (closed within the same Forex day), and no rollover/swap will apply.

Important: A Forex day doesn’t correspond to a normal/calendar day.

If you’re unfamiliar with a Binary Option, it is a type of option where the payoff is either all or nothing and will be based on whether or not a particular event occurs. Because of this characteristic, Binary Options may be simpler to understand and trade than traditional options.

This short guide will detail how to trade binaries, and the important steps you need to know before you start trading.

Binary Options or “binaries” can be easily traded online via the Banc De Binary Exchange Platform, an inner company regulated, online futures and options exchange. In approximately 5 minutes, and with $100, you can open an account and start trading. Banc De Binary provides all the tools and information one needs to begin trading binaries.

To determine whether a binary contract will end in- or out-of-the-money at expiry, you need to gauge the value of the underlying asset. It is best to pick a binary market in which to trade based on your level of familiarity or understanding of that market. It may be as simple as reading a news article or following an economic event that morning, or your market familiarity might be based on prior options or futures trading knowledge. Banc De Binary provides clients with numerous news and research links on its binary contract details pages where a trader can go to retrieve additional information about a particular market.

On the Banc De Binary Platform, you can trade binaries on the following markets:

Indices:

Stocks:

Commodities:

Currencies:

When taking a position in a binary contract, you should have a sense of the direction of the price movement of the underlying asset or a sense of the chance of the event occurring. All binary contracts are driven by the value of the underlying asset moving up or down, or by the likelihood of the event occurring. For binaries based on underlying asset prices (like Gold, Silver, Crude Oil, etc), you can gain a sense of the direction of future price movements by reviewing the hourly, daily and weekly price chart of the underlying asset on the Banc De Binary website. You may also refer to numerous other information sources such as financial websites, which display price movements and predict future market trends.

If you believe that the price of the underlying asset is going to go up, to above a particular strike price, or the event is going to occur, you take a Long position on that contract, meaning you “Buy” the contract.

Alternatively, if you believe that the price of the underlying asset is going to go down, at or below a particular strike price, or the event is not going to occur, you may take a Short position on the contract, meaning you “Sell” the contract.

All binaries on Banc De Binary have at least a 70% payout. The price of the contract is equal to the probability of the event happening.

1.    Know the underlining asset - Binary Options derive their financial value from underlying assets. Prior to investing in a Binary Option, make sure you understand the underlying asset, are familiar with the relevant financial markets and where the asset is traded. Example: Silver Futures are listed on NYMEX/COMEX.

2.    Know how to interpret a Binary Option price – The price at which a Binary Option is trading is an indicator of the chances of the contract ending in-the-money or out-of-the-money.

3.    Understand the relationship between risk and reward. Risk and reward go hand-in-hand in Binary Option trading. The more the risk or unlikelihood of a particular outcome occurring, the greater the reward associated with it. An intelligent investor understands and weighs each contract on these two matrices before taking a position in a contract.

Foreign currency traders or investors, who want to hedge their risk against adverse currency movements.

Futures traders and dealers of precious metals like gold and silver, who want to hedge their risk against weakening prices.

Gas station owners could hedge against crude oil price increases, which would represent increased product costs to them.

Shareholders who wish to hedge their equity risk against poor company performance that does not meet analyst expectations or a potential merger deal that might dilute their equity.

Home owners who would like to hedge their risk against weakening real estate prices.

Bond holders who want to hedge their risk against falling fed fund and inter-bank interest rates.

Options trading uses several related phrases that are unique to options markets. Some commonly used, but often misunderstood options phrases are:

Call

A Call is an options contract that gives the buyer the right to exercise the option and buy the underlying commodity at the strike price on (European style options) or at any time up to (US-style options) the expiration date.

Put

A Put is an options contract that gives the buyer the right to sell the underlying commodity at the strike price on (European style options) or at any time up to (US style options) the expiration date.

The Reversal
This is based on a concept that if, for example, an asset happens to move in one direction, it is somewhat unlikely to remain at that top position and will soon move back towards its original position, and at times all the way. As you can see, an investor should buy an option, Call or Put, depending on whether the price has risen or fallen rapidly, assuming that it will soon return.

The Straddle
This is more complicated because it involves buying both a Call and Put option on the same asset. The idea is to straddle the asset at a low point as well as a high point, therefore the area in between the two options can be twice as successful for the investor. This is usually used when the volatility of the asset is high and so an investor wishes to protect himself. An expiry level in between the two strike prices would be ideal, although, if it happens to fall outside this parameter, then at least one option would expire in the money.

The Knock-on Effect
In our CEO's opinion this is the most logical of all the strategies. The thinking behind this is that a move in one option will have a knock-on effect to another. Say the price of a stock may affect the price of the index in which it is traded. The key here is to understand the connections between assets and attempt to anticipate the movements in either one.

The Black–Scholes Model is a mathematical description of financial markets and derivative investment instruments. The model develops partial differential equations whose solution, the Black–Scholes formula, is widely used in the pricing of European-style  options.

Cash-Or-Nothing Call

This pays out one unit of cash if the spot is above the strike at maturity. Its value now is given by,

Cash-Or-Nothing Put

This pays out one unit of cash if the spot is below the strike at maturity. Its value now is given by,

Asset-Or-Nothing Call

This pays out one unit of asset if the spot is above the strike at maturity. Its value now is given by,

Asset-Or-Nothing Put

This pays out one unit of asset if the spot is below the strike at maturity. Its value now is given by,

Foreign Exchange

If we denote by S the FOR/DOM exchange rate (i.e. 1 unit of foreign currency is worth S units of domestic currency) we can observe that paying out 1 unit of the domestic currency if the spot at maturity is above or below the strike is exactly like a cash-or nothing call and put respectively. Similarly, paying out 1 unit of the foreign currency if the spot at maturity is above or below the strike is exactly like an asset-or nothing call and put respectively. Hence if we now take rFOR , the foreign interest rate, rDOM , the domestic interest rate, and the rest as above, we get the following results.

In case of a digital call (this is a call FOR/put DOM) paying out one unit of the domestic currency we get as present value,

In case of a digital put (this is a put FOR/call DOM) paying out one unit of the domestic currency we get as present value,

While in case of a digital call (this is a call FOR/put DOM) paying out one unit of the foreign currency we get as present value,

And in case of a digital put (this is a put FOR/call DOM) paying out one unit of the foreign currency we get as present value,

Skew

In the standard Black-Scholes model, one can interpret the premium of the binary option in the risk-neutral world as the expected value = probability of being in-the-money unit, discounted to the present value.

To take volatility skew into account, a more sophisticated analysis based on call spreads can be used. A binary call option is, at long expirations, similar to a tight call spread using two vanilla options. One can model the value of a binary cash-or-nothing option, C, at strike K, as an infinitesimally tight spread, where Cv is a vanilla European call. 

Thus, the value of a binary call is the negative of the derivative of the price of a vanilla call with respect to strike price:

When one takes volatility skew into account, σ is a function of K:

The first term is equal to the premium of the binary option ignoring skew:

is the Vega of the vanilla call; is sometimes called the "skew slope" or just "skew". Skew is typically negative, so the value of a binary call is higher when taking skew into account.