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What Are Binary Options and How Do They Work?

What are binary options in the UK? One may ask and this is a very genuine and it is important to ask this question before you get involved in the binary options trading.

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Many newbie investors and traders in the binary options market tend to get into it before seeking advice from knowledgeable people or doing some research online which is even easier since the internet has become an open playground for all who are seeking investment advice.

The more questions one asks the better the person becomes and this knowledge they have equipped themselves with will determine a lot in their decision to becoming part of the binary option industry.


What are Binary Options?


Binary options are based on the better known options trading, where by the trader buys a number of contracts on a particular tradable asset, it could be gold, Eurodollar, wheat, soy beans or any other contract especially the commodities.

The trader will buy like $500 worth of soybean contracts and he or she will hold the contracts until it gets to its expiration period, and if the expiration takes place and the trader is in the money or the trade went his or her way then he can sell the contract before delivery and take the profits.

If it happens that the trade expired out of the money then the only amount lost on the trade is the $500 invested into buying the contracts.

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When you think from this perspective you realize that the risks trading options are known before hand and they are controlled by the option trader and there is no way the trader can lose more than they had put into the trade but the potential to make massive astronomical returns are quite possible.

The returns on the contracts are based on the appreciation of the contracts bought. So with this knowledge you can now think of binary options as the short term based version of the normal options trading.


How Do Binary Options Work?


Binary options involve speculating the short term changes of a particular asset in this case it can be a forex pair, commodity, index, or a stock or any financial instrument that can be speculated.



The amount on expects to place into the trade is put before the trade is executed and the only change that is realized is that the expected return on investment is known.

There are some binary options brokers who lets the trader decide which outcome they would want to have on each trade they take and also they are given a choice on the duration in which they are allowed to be in the trade.

Those binary options brokers have given their traders full control of their trading and this are characterized as very good brokers and there are some brokers who have preset times to be in a trade, preset trade outcomes and this puts the trader in a bit of a bind since they can only do as much as the trader permits. These types of brokers should be avoided at all circumstances.

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There are binary options that allow you to take your profits or lock them in before the expiration time kicks in, this is very effective and important for a trader because you may be sitting on a good profit and your trade is showing signs of a reversal then you will have to close and take the profits and wait for another opportunity to arise.

On the same issue there are brokers who only give the trader an option to take their profits only when the trade closes within the preset levels and only when the trade expires, this may lead to losing so many trades based on that fact and yet they may have been all in profits.


Types of Binary Options


There different types of binary options; the high or low binary option, whereby you decide whether your trade is going to close higher from the current price level or lower to the current price level.



Then there is the touch or no touch binary option, here the trader decides whether the trade will touch a particular price level to be on the money or price will touch a particular predefined level to be on the money, if either does not go as planned then the trade closes out of the money.

There is the boundary binary option; here the trader decides whether price will remain within a particular level of price predefined before the trade is executed.

The trade can be defined in a manner that the trade is expected to stay within the boundary or price is expected to stay out of the boundary to achieve a profit.

This is further refined by including the aspect of time, how long will price remain within those levels and how much will they yield as a payout.

The other common type of binary option is the short term binary option, which is time based from as low as five second trades to a maximum of 5 minutes and there is the long term trades, that may last from a few minutes to a few hours to even a day or months or even the whole length of the year.  All these variations are offer by the binary options brokers in the industry.

For all United Kingdom traders who are asking what are binary options then they can be notified that the Financial Conduct Authority does not recognize binary options as an investment tool rather it is considered gambling and this exposes it to a lot of risk.

The Financial Conduct Authority does not regulate any firms or their activities in the United Kingdom. So the trader is susceptible to risk and the regulatory body is not in any position to protect them in the case of misconduct or malpractice from the broker’s side.


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