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What You Need To Know About Binary Options Outside the U.S

What Do You Need To Know About Binary Options Outside the U.S?

Binary options let traders profit from price fluctuations in multiple global markets, but it’s important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.

Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes.

The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors „to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.“ 

Key Takeaways

  • Binary options have a clear expiration date, time, and strike price.
  • Traders profit from price fluctuations in multiple global markets using binary options, though those traded outside the U.S. are structured differently than those available on U.S. exchanges.
  • Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange.
  • While typical high-low binary options are the most common type of binary option, international brokers typically offer several other types of binaries as well.

Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices, and expiry dates. Negatives include non-ownership of the traded asset, little regulatory oversight, and a winning payout that is usually less than the loss on losing trades.

Understanding Binary Options Outside the U.S

What Are Binary Options?

Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities, and foreign exchange.

These options have a clearly stated expiration date, time, and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, they are paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.

The binary options trader buys a call when bullish on a stock, index, commodity, or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time.

The broker discloses the strike price, expiration date, payout, and risk when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.

Binary Options Outside the US

Foreign Versus U.S. Binary Options

Non-U.S. binary options typically have a fixed payout and risk and are offered by individual brokers rather than directly on an exchange. These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an „all-or-nothing“ payout structure.

Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).

The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008.   The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC.

These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration.

They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.

High-Low Binary Option Example

Your analysis indicates the Standard & Poor’s 500 index will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis.

You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.

Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules.

In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment.

If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.

Other Types of Binary Options

The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well.

These include „one-touch“ options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time.

Meanwhile, a „range“ binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.

As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, the risk and reward is always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.

Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won’t lose their entire investment.

The Upside and Downside

Risk and reward are known in advance, offering a major advantage. There are only two outcomes: win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: Is the underlying asset going up or down?

In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.

On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses.

While payout and risk fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades cost the trader more than they can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.

What is binary options trading?

Binary options trading is a relatively simple way of betting on whether or not a certain outcome will occur. The name ‘binary’ (meaning ‘two’) reflects the fact that you must choose from just two scenarios – yes or no.

In financial trading, this is typically whether the price of an asset will be lower or higher than a certain level at a pre-determined point in time.

The most common type of binary option is a digital option, sometimes broken down further into ‘up/down’ or ‘call/put’ options.

With a simple call/put option, if you think the price of the underlying asset will end at or above the strike price, you buy a ‘call’ option. If you think the price will be below the strike price at expiry, you purchase a ‘put’ option.

If you are correct, the option is ‘in the money’ and pays out a fixed amount of compensation.

This compensation is typically money but in some contracts can be a quantity of the underlying asset itself.

If you are wrong, it is ‘out of the money’ and you receive nothing.

Because of this, binary options are sometimes called ‘all-or-nothing options’.

The attractions of binary options trading

Because you have just two possible outcomes to consider, binary options trading is considered simpler than many other kinds of financial trading.

Typically, all you need to decide is in which direction you think the price of the underlying asset will move.

Unlike with other forms of financial trading where your potential profit or loss is determined also by the size of a price movement, it doesn’t matter to a binary options trader how far prices have moved above or below the agreed strike price when the option expires. With binary options, a winning trade always produces the same payout.

Because of this, you have a clear picture of your risk-to-reward ratio before you enter a trade.

This is in contrast to traditional options, where profits and losses can be limitless.

With binary options, therefore, you don’t have to sit at your trading terminal, anxiously watching prices – once you have made your trade, you don’t need to check in until the contract has expired. You also don’t have to worry about applying complicated risk management tools like stop losses.

Binary options are flexible, with brokers typically offering contracts for a wide variety of underlying assets – from foreign exchange or commodities to company shares or indices like the FTSE or S&P 500.

Contracts can also run for anything from 30 seconds to several months, depending on what your broker offers. This means you can tailor your trading to your own areas of expertise or trading style.

If you’re an experienced trader in other markets, such as foreign exchange or shares, you can apply some of the skills you have already developed.

Fundamental and technical analysis, for example, can both be used to help you form a view on future price movements.

The risks of binary options trading

With binary options, it is possible to lose all the money you have invested if none of your trades are successful.

Careful money management (see Lesson 6 https://learn.tradimo.com/lessons/1278) should however ensure that you do not wipe out your entire trading account.

An example trade

All or nothing call:

The current price of Uncle’s Apples shares is $10. If you think the price will go up and trade above $10 this time tomorrow, you can profit from this expectation by buying a one day binary call option.

Before buying the option you need to decide how much money you put on the trade. This will be your investment (your risk) and your payout will be a certain percentage of this amount. If the broker is offering a 50% payout, it means, if you win, you get your investment back plus 50% on top of it.

Let’s say you invest $20 in a one day Uncle’s Apples binary call option with a 50% payout. You come back same time tomorrow to see how your trade performed. You were right, the price is above $10 per share, that is, your option expired in the money. You get your $20 investement back plus 50%, that’s $10. So you get $30 altogether.

However, if Uncle’s Apples shares were below $10 when the contract expired, the contract becomes worthless. Then the option would be out of the money and you would lose your initial investment of $20.

Other types of binary option

With a ‘one touch option’, you predict that the price of the underlying asset will at some point during a defined contract period touch (reach or surpass) a certain level. If it does, you receive a payout. If it doesn’t, you receive nothing.

With a ‘no touch option’, you predict that a certain price will not be touched during the contract period, and are compensated if you are correct.

With a ‘double touch option’, you define two price levels and predict that at least one of them will be touched during the contract period. You receive a payout if this happens. If the price stays within the range of these two prices and touches neither, you receive nothing.

Note that the closing price at the end of the contract period is irrelevant with any kind of touch option. This makes them perfect for traders who believe that prices will be volatile but aren’t confident about predicting a sustained price move.

They are therefore particularly popular for trading volatile assets like foreign exchange and for very short-term trading with contract periods as short as one minute.

Summary

So far you have learned that:

  • binary options got their name from the fact that there are only two scenarios to consider: the market ends up either above or below your target price when the option expires
  • you get paid a set amount, typically a certain percentage of your investment if you are right or you lose your investment if you are wrong
  • it is because of these two reasons that binary options have gained a huge popularity in the last few years
  • brokers have created a variety of binary options contracts so you can take advantage of special market conditions, such as ranges, breakouts, tests of significant price levels and trending markets

Binary Options

What are binary options

A binary option is a type of option with a fixed payout in which you predict the outcome from two possible results. If your prediction is correct, you receive the agreed payout. If not, you lose your initial stake, and nothing more. It’s called ‚binary‘ because there can be only two outcomes – win or lose.

Advantages of binary options trading

Aside from the simplicity of its ‚yes or no‘ proposition, binary options trading is also very flexible. It gives you the ability to trade:

  • All markets

Trade on underlying markets that include Forex, indices, commodities, and more.

  • All market conditions

Predict market movement using up/down, touch/no touch, and in/out trade types.

  • All durations

Take a short-term or long-term view with trade durations from 10 seconds to 365 days.

  • All payouts

Earn payouts up to USD 50,000. Losses are limited to your initial stake and nothing more.

Why you should trade binary options with Binary.com

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How to trade binary options

Binary options trading is relatively easy. You can purchase a contract in just three steps:

Avoid these 4 mistakes and trade binary options profitable!

Binary options trading can be easy, but so can be making mistakes. There are several mistakes made by most of the new traders. Amongst them are, for example, overtrading and failure to observe proper money management techniques (handling of the money on a trading account and choosing the right trade amounts).

Mistake no. 1: Overtrading

I consider overtrading probably the biggest and most common mistake often made not only by beginners but also by advanced traders . Overtrading in the case of binary options means one thing: Traders always want to earn as much money as possible and as quickly as possible and therefore, want to make as many trades as possible. Sometimes it may work out, but I tell you one thing: One day that man trips and loses money.

Always trade according to what you really see on the chart.

Not, what you think you see.

It is important to remember one thing. You don‘t ALWAYS to need use ALL of the signals to be successful on the market. The market is moving without you. And the price patterns are also created by it. So, even though sometimes you think you see a great price formations and the market simply has to turn around, you better think again.

It is always better to do less trades, because when it’s all over and the stock market is be closed, you will never regret the trades you didn’t take, but you certainly will regret the trades you took that were wrong.

Mistake no. 2: Bad money management

Even if you’ve already learned and are not doing crazy 50 trades a day, there is still one thing you have to realize. You should never trade with more than 5% (or, in extreme cases 10%) of your current account. Why? Because you would simply blow your account in just a few unsuccessfull trades. Remember that trading is a long term business. Even if your balance increases steadily by 5 % every day, you’re making way more money than you would with a savings account. And maybe even more than in your regular 9-5 job.

Mistake no. 3: Looking for a miracle

This is also an often touted topic. And I must admit, I was not different at the start of trading binary options. I’ve tried to find the best strategy there is and just download it. I searched for a variety of terms… “Binary options strategy, 15 minutes binary strategy,” and so on…

Looking back, it was stupid. I don‘t know what I was looking for. Probably for a strategy, that will instantly start making me some money. Some can be found on our website (strategy section) or eg. 5 minute strategies on best binary options strategy.com

Does it make sense to look up a binary options strategy? Well, kind of. For me, yes. For newcomers, it certainly makes sense! Somehow, it will make finding and devising trading systems a more pleasant experience. You will learn many things about the Meta Trader indicators, and even learn to estimate the market.

But remember – with any strategy there is, you always have to use common sense.

Mistake no. 4: Untested strategy

The fourth mistake is closely related to the previous point. I advised you to some extent, to look for the strategies and try them. But no strategy is bulletproof, and some are completely useless. Sometimes, this is not possible to determine by simply looking in the history, because the indicators can be repainted. Therefore, I 100% recommend trying all the strategies, with which you want to trade on a live account, on a demo account first. You can find demo accounts at these brokers: Brokers with the demo account.

Free demo account with IQ Option

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Author

More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

Beste Broker fur Binare Optionen 2020:
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    Binarium

    Der beste Broker fur binare Optionen fur 2020!
    Ideal fur Anfanger!
    Kostenloser Unterricht!

  • FinMax
    FinMax

    2 Platz in der Rangliste! Zuverlassiger Broker!

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