What You Should Know Before Trading Binary Options

by Justin on May 27, 2015

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Now that the recession seems safely behind us, a lot of people finally feel comfortable to begin investing again. Leaving your money in a savings account may have felt like the right move when the market was suffering, but you can’t do it forever. Smart investing is the only way to stay ahead of inflation. With so many methods available, though, you may be confused about which one to pick. There are a lot of reasons to go with binary options. Just be sure you understand the following first.

What Are Binary Options?

First, let’s explain these options for those who have never heard of them. These options come in a number of forms, but at their core, they are nothing more than estimates on how an underlying asset will perform given a specific amount of time.

This means that you really only ever have two choices to make with binary options. Do you think it will increase in value (that would be a call option) or decrease (that would be a put option)? That’s really all there is to it.

Literally, it’s just those two choices. You don’t try to guess how high or low the stock will go, only the direction it will move. While this means you won’t win more for a stock that doubles in price, it also means you have a much easier decision to make with your investment.

The Expiry Date

Another important factor to understand about binary options is the expiry date. If you buy shares in a stock, you could be waiting years before it’s a good time to sell them. Meanwhile, you could turn into a nervous wreck, constantly checking the price to see if it’s time.

With options, you have an expiry date. It’s predetermined, so you know when it is long before you invest a dime. This is the date when you’ll find out whether your investment will pay off or not. If you thought the stock would go up and it did at the expiry date, you’re a winner. If it didn’t, then you obviously lose.

Underlying Assets

There are a number of underlying assets you can trade with options. This is important because it means that your specialized knowledge in a certain industry may pay off. It also means that you don’t need a specific area of expertise to trade. If you’re a complete rookie, pick one of the following to begin with and move on from there. The various underlying assets you can choose from include:

  • Forex (e.g. USD, JPY, EUR, etc.)
  • Indices (e.g. Dow Jones, Nasdaq, etc.)
  • Commodities (e.g. gold, platinum, palladium, silver, corn, oil, etc.)
  • Stocks (e.g. Coca-Cola, Google, Facebook, Deutsche Bank, etc.)

While binary options aren’t especially difficult to trade, there will definitely be a bit of a learning curve when you first start. However, as long as you understand the above, the rest should come to most investors pretty easily.

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