What are Binary Options?
Binary options are trade types which present two possible trade outcomes out of which the trade has to choose one and choose correctly in order to profit from the trade. Binary options are also known as “all or none” options (trader wins all or loses all the investment), digital options or fixed return options (returns on investment are fixed irrespective of extent of price movement in favour of the trader).
The Role of Binary Options Brokers
Binary options brokers play several roles in the market:
- They act as custodians of traders’ funds. Most regulatory protocols require these funds to be kept in a segregated account.
- They provide the trading platforms, the tools, charts and educational resources found on these platforms.
- They obtain pricing from liquidity providers and provide same for every asset listed on those platforms.
- Some binary options brokers also design specific trade types that are unique to their platforms.
6 Signs to Look for in a Binary Options Broker
What are the 6 factors you should consider when looking for a binary options broker?
- Look for brokers that are regulated and are in good standing with the regulators of the jurisdiction they operate in.
- What instruments are you familiar with and want to trade?
- What trading style do you want to use?
- Do they have suitable bonuses
- Are they an established broker?
- Do they offer accounts that match your deposit size?
- Trading style
- Minimum deposit requirements
- Length of time in business
Regulation of binary options has undergone a lot of evolution from the early days of the market. In the US, regulation of binary options was decided very quickly when they were classified as a market whose assets had to be drawn from the regulated markets in the US. The Commodities and Futures Trading Commission (CFTC) was therefore able to immediately draw up guidelines under which exchanges could offer binary options to the trading public.
In other countries, there were initial problems due to the classification of binary options as gambling products and not financial derivatives. Some companies took full advantage of this status to setup up fly-by-night brokerage firms that ended up quickly closing up shop. The Cyprus Securities and Exchange Commission (CySEC) realised that the activities of these fly-by-night brokerage firms operating out of Cyprus was negatively impacting their reputation and took action to classify binary options as a financial derivative and put them under regulatory supervision.
This shook up the industry and pretty soon, regulators in UK, Japan, Australia, Russia and other countries followed suit.
These actions aimed at cleaning up the industry have had a great effect in popularising binary options and have increased market confidence in the products offered by binary options brokers. Presently, binary options are regulated in these countries:
- US: Commodities and Futures Trading Commission (CFTC)
- UK: Gambling Commission
- Cyprus: Cyprus Securities and Exchange Commission (CySEC)
- Australia: Australian Securities and Investment Commission (ASIC)
- Japan: Financial Futures Association of Japan (FFAJ)
- Malta: Maltese Financial Services Authority (MFSA)
Several other countries such as Russia, the UK and Canada are in the process of revamping their regulatory protocols for the binary options market.
When choosing a binary options broker, at a minimum, choose one which is regulated.
Types of instruments You Want to Trade
One reason that the binary options market is growing in popularity is because all the major asset types can be traded, including stocks, currencies, commodities and stock indices. On American exchange-traded options, it is also possible to trade a few exotic assets such as ETFs and news releases such as the US Jobless Claims and the Non-Farm Payrolls.
Exotic assets that are available to trade are mostly determined by the geographical spread of the traders of a broker. For instance, a brokerage firm that is targeting traders in the Middle East and Asia may decide to offer a predominance of stock assets, stock indices and currency pairs which are found in markets in those regions. European-based brokers may decide to offer mostly European assets. That is why on some platforms, there is a predominance of instruments from certain countries. In general, each broker will have a full list of assets that they service and this is usually available for viewing before a decision on opening an account is made. If you know what instruments you want to trade, making sure it is available before trading would be beneficial.
Different types of binary options exist in the market and the list keeps growing from year to year as brokers look for new ways to attract more traders to their platform. Here is a brief description of some of the binary option types that are available today.
Will the asset end the trade higher or lower than market price? This is the classical binary option type found on the platforms of all binary options brokers and with different names such as Up/Down, Above/Below, High/Low, etc.
A strike price is provided and the basic question which this trade answers is: will the price action touch this price target or fail to touch it?
Two strike prices are provided; one above and another below the market price. As the alternative name (Touch Up, Touch Down) suggests, the choice for the trader is whether the price action will touch the strike price above, or the one below within the one-week expiry time.
The In/Out option is given this name because the price must stay IN a range of prices or break OUT of that range while the trade is active. Two prices are provided by default: one above and another below the market price to provide a floor and ceiling which serve as the boundaries of the trade. This is why the trade is also called the Boundary, Tunnel or Range trade. A variant of this option also allows traders to choose their own price ranges. This trade tests the momentum of price action. Weak momentum leads to prices tending to stay within a range; a situation seen when traders are waiting for big market news. Strong momentum is seen when big news which creates a market surprise is released, which causes the price action to break out either above or below the defined range of prices.
This binary options type is so-named because the trade comes with several strike prices arranged in sequence like the rungs of a ladder. Each strike gives a payout. So this trade comes with an opportunity to get several payouts, depending on how many of the strikes are touched by the price movement before the trade expires.
The Kick In, Kick Out (KIKO) bets are found on a few selected platforms. These bets are like the Touch Up, Touch Down trades but are different because they have no expiry time. It is a question of which target the price action can attain first. Two strike prices are provided; one above and another below the market price. The trader makes a selection on the strike price that will be hit first before the other. If the price action gets to the chosen strike first, the trade is a winner. If the other strike price is hit first, the trade is a loser.
There are all manner of speed-based, short-term bets available on binary options platforms. The most prominent of these is the 60-seconds option. These are basically Call/Put options which have an expiry time of just 60 seconds. The speed with which these bets are concluded against the backdrop of difficulty in defining a trend within this time makes these bets difficult to trade.
With so many different types available, having the type of Binary option trade you want to conduct, is an important factor to consider.
Bonuses are incentives provided to traders to get them to open and fund new accounts, or to increase their trade volumes. Binary option brokers offer a variety of bonuses including:
- Deposit bonuses which are provided to new traders when they make the first deposit into the trading account.
- No-deposit bonuses which are provided to new live account holders to enable them get a feel of the market before making that first deposit.
- Cashbacks, which are usually bonuses provided as a return of a percentage of trading capital used in achieving a specified trade volume.
With bonuses it is always important to understand the terms and conditions which impact when you can actually receive the benefits.
How Long Have They Been in Business
A broker that has been in business for a longer time will have a track record which can be used as a benchmark to showcase how reliable they are. An established broker will be less likely to go bankrupt or be a fly-by-night operation. Ensuring your broker has positive track record for a few years can help filter out fly-by-night operators.
Most Binary Option brokers offer a variety of account types and options with several minimum deposit requirements. Generally speaking, a micro account or a starter account will have lower minimum deposits than a VIP account and lower perks too.
Typically, small accounts start from a few hundred dollars, mid-cap accounts run into a few thousands and VIP/Premium accounts run into tens of thousands of dollars for minimum deposits.
As most brokers offer a low minimum deposit requirement, this should not have a major impact on choosing the best broker for you.
Advantages of Binary Options vs Forex Trading
Binary options present some key advantages over forex trading and some of these are as follows:
a) Binary options operate on the basis of a fixed return which is not dependent on the extent of price movement in pips. This means that you know the exact amount your stand to make or loose on the outset of making the trade. In contrast, profits / losses in forex are dependent on how many pips were made / lost in the trade and can be far larger or smaller than anticipated.
b) Binary options allow traders to trade assets with lesser money than they would have done in traditional markets. For instance, a trader can trade a position in the EURUSD with as low as $25 in binary options, but a mini-lot position in the EURUSD with a leverage of 1:100 in forex requires more capital to trade.
c) When trading currencies in forex, traders in certain regions of the world are trading assets they are unfamiliar with, whereas with binary options, you can have a chance of trading assets from your region with which there is more familiarity.
d) The binary options market is an unleveraged market and the trader can never lose more than what was invested in the trade. In contrast, slippage can cause a forex trader to lose not just what was invested, but possibly their entire deposited amount and more. This is what happened to many traders when the Swiss National bank de-pegged the EURCHF on January 15, 2015.