What are Binary Options and How Do They Work?

What is a binary option?

 

A binary option is a financial instrument based on a simple yes or no question where the payoff is a fixed amount or nothing at all.

This means binary options offer defined risk and clear outcomes on every trade.

Each binary option trade starts with a question - will this market be above this price at this time? If the answer is yes, you can buy the option. If it’s no then you can sell the option.

The price of a binary is always between $0 and $100, and just like in other markets, there is a bid and ask price.

The binary options we offer are always built the same way. Each trade is easy to understand.

If you think about it, binary options reflect the way we think about things in our daily life. Things either happen or they don’t. With a binary option, payouts reflect that and are always all or nothing at expiration. You’ll find we like to keep trading simple.

You can also close a position early to lock in profits or limit losses.

As an active trader, we know you are busy scanning markets each day. You are dealing with complexity all the time. The last thing you need is to be slowed down with more complications and hard to understand details with a brokerage.

When you trade, we know you want to focus on the market and your position, not on a series of unnecessarily complicated products.

So we built an innovative full service exchange to trade binary options that lets you do just that.

 

 

How do binary options work?

 

There are three concepts to learning more about how binary options work; the underlying market, strike price and time to expiration.

Become familiar with those three concepts and you’ll understand the basics of binary options.

 

Let’s walk through the three parts of each binary option trade:

With binary options the amount you pay is the maximum you can lose. Because of that we say your risk is capped.

Maybe you don’t want to wait until expiration. You can place an order to close your position to limit loss or lock in profit early.

Along with offering clear outcomes and defined risk, we also designed our binary options to work in a way that offers unique leverage that enables opportunities to profit even from small market movements.

 

1  The first step is to pick the assets or event you want to trade. Each one is based on an underlying market and your trade is based on that underlying markets price movement.

2  Then you want to find a strike price that works for you. The strike is the price level you think the market will be above or below at expiration.

3  When opening a trade you will select an expiration day and time. The expiration is the moment of truth traders live for. This is when trading is over and the value of your binary option is determined.

 

 

How risky are binary options?

 

You always know your binary option risk reward ratio before you enter into a new trade. Your trade is fully paid for up front, which means you will never lose more than you pay. You always know exactly what you have at risk.

Trading also offers the opportunity to profit. Just like you know what you have at risk, you will enter each trade knowing your maximum potential reward.

 

We’re serious about helping you understand and limit your risk. Our goal is to let you define and understand it clearly and upfront on every trade.

It’s why we’ve worked to design and offer an innovative way to define and cap risk while also providing an affordable way to trade.

You can start with one contract at a time for less than $100, and decide your maximum risk and reward up front when you set up the trade.

 

Here’s how that works:

If you buy a binary option contract for $30, hoping to have it end at $100, your profit target is $70. This is $100 less your $30 investment. A loss would never be more than $30 no matter how much the market moves.

We think that hard to understand margin requirements, complicated fees and confusing payout structures can make trading riskier than it needs to be.

You can make those things part of your past by trading binary options with us.

 

 

How are binary options regulated in the US?

 

Binary options are regulated by the Commodity Futures Trading Commission (CFTC).

Binary options are legal and available to trade in the US only on a Commodity Futures Trading Commission (CFTC) regulated United States exchange.

We are a full service exchange located in the heart of Chicago’s financial district and we are regulated by the CFTC.

As the leading United States based binary options and spreads exchange, we are proud to say we are designated by the CFTC as a Designated Contract Market and Derivatives Clearing Organization.

What this means for you is we are a well-regulated and leading binary options exchange.

Our role as the leading US based binary options exchange is to match buyers and sellers in a fair, accurate and secure way.

That way you can trade multiple global markets with us from one account knowing your trades are fair and your money is safe.

 

 

Binary options trading example.

 

Let’s walk through a trade on the EUR/USD currency pair.

Here is how the outcomes work at expiration:

  1. If the market is at or below 1.1600 at 3AM ET the seller will get the $100 payout.
  2. But if the market is one tick or more above 1.1600, you get the full payout as the buyer.

If you don't want to wait until expiration, you can close your position at the current market price. Your profit or loss in that case is the difference between your entry and exit prices.

Each binary option reflects a question. In this case, the question is, will EUR/USD be above 1.16?

We show that as EUR/USD > 1.1600

In this example, the option has 4 hours til expiration and it’s 11pm.

If you think EUR/USD is going to be above $1.16 at 3AM, then you would then buy the binary.

 

 

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