How to Trade Exotic Binary Options

by Mike Parker

Binary options, sometimes referred to as digital options, are sophisticated, short-term trading products. Binary options, unlike traditional options, pay out a fixed return on investment if the required conditions are met, and may offer a small rebate to the investor if the required conditions are not met. Binary options are available for both institutional and individual investors, but they can be highly speculative in nature and are not appropriate for all investors.

Open an investments brokerage account with a firm that offers binary options trading services. You will need to provide certain required information, which typically includes your name, physical address, contact information, age, taxpayer identification number or social security number, and information regarding your investment goals and temperament. You will typically be required to make an initial deposit into your trading account. The amount of the minimum deposit varies based on the individual brokerage company. Be aware that not all brokerage firms offer this type of trading account.

Determine the binary option you wish to trade, which will be listed by underlying asset, strike price and expiration. You can buy either call options or put options. Binary options may trade on individual stocks, indexes, currencies and commodities. Most are short term in nature with expiration dates ranging from less than one hour to approximately one month, although some listed binary options may have longer expirations. The most commonly traded form of binary options is the all-or-nothing option, which pays out a fixed return if the price of the underlying asset finishes above the strike price for call options or if the price finishes below the strike price for put options. Other forms of binary options include one-touch options, no-touch options, double-one-touch options and double-no-touch options.

Enter a buy order for the binary option you wish to purchase. Binary options do not have an exercise option. You cannot exercise your call binary option and take possession of the underlying security, nor can another investor exercise his put binary option and require you to purchase the underlying option. If the binary option meets the payout requirements your account will be credited with the fixed payout. If the binary option does not meet the payout requirements the option will expire worthless, although some binary options may return a token portion of your investment, typically no more than 10 percent, to your account.

Warnings

  • Binary options are sophisticated investment products and are highly speculative in nature. They are not insured by any agency of the federal government. You may lose some or all of your investment.
  • Past investment performance is never a guarantee of future results.

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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