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Trading Binary Options
A so called “all or none” approach to trading options on stocks, commodities, or foreign currency is trading binary options. As with all other options trading the buyer of a put or call in trading binary options limits his or her risk to the price of the options contract. An attractive aspect of trading binary options is that the reward can be substantially more than when trading regular options contracts. Although technical analysis is essential for profiting binary options trading many otherwise profitable day trading strategies do not apply.
In a regular options contract the buyer of a call contract purchases the right to purchase a stock, commodity, or currency at the market price, called the strike price, no matter how high that price might climb. He or she is under no obligation to do so. The seller of a call contract is paid for accepting the risk that the price of the underlying equity will climb significantly. He or she is obliged to honor the contract if the buyer chooses to execute it. The buyer of a put contract pays for the right to sell a stock, commodity, or currency at the strike price no matter how low the price may fall. His or her risk is limited to the price of the contract. The seller of a put contract is paid for assuming the risk that the equity in question will fall significantly in price causing huge losses. In the options business sellers make more money than buyers over the long term. However, the risk of an occasion big loss is such that options selling, or writing, is chiefly limited to those with deep pockets.
How Does Trading Binary Options Differ From Trading Regular Options?
As a practical matter most options traders simply exit the contract when they have made a profit or want to limit a loss. They do so by executing the opposite trade. The gain in regular options trading is basically the difference between the strike price and the current market price. In trading binary options the cost of the contract is the most that the buyer of an options contract can lose. In trading binary options the buyer of an options contract gains cash or the asset if his trade works out correctly. But, there is no in between. In trading binary options the trader gains the asset or cash or he gains nothing. Binary options are a possible way to profit from the news in day trading due to the short time frame of these contracts.
Binary Options Time Frame
Trading binary options is a short term endeavor. One pays for the contract for a put or call. If the equity closes the hour as expected, the trader makes money. If not, he loses his investment. Binary options traders cannot exit their trades while in process. This type of trading requires very close attention to the market and a strong skill set in technical analysis.