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What are binary options?

Binary options trading is a new way people are earning money online. They are a financial instrument whereby you purchase a contract on an asset (e.g. AUD/USD, USD/JPY, Gold, Nikkei etc.) and receive the payout upon the expiry time if you predicted correctly.

To trade binary options, we only need to understand two potential outcomes: will the asset go up or will it go down in value?

Trading HighLow gold binary optionsSource: HighLow Australia Platform

Binary options have become a very popular investment strategy in recent years, mainly because they are simple to understand and although used by professionals, it is easy for beginners to get started. Some people dismiss binary options as gambling, and we discuss this topic in depth here.

Returns

Binary options can be very profitable with payouts of typically 170-190% of your invested capital. One of the differences compared to regular forex trading is that binary option traders do not use borrowed money or leverage, and already know their potential profit and risk to their capital before they enter a trade.

Example of a binary options trade

Below we have a simple example of investing in the AUD/USD currency pair with a 5 minute option. The time is currently 12:30pm and the option expiry time is 12:35pm. We only need to select “HIGH” or “LOW” and if we have chosen the correct direction at the expiry time 12:35pm we receive 185% of our invested capital.

Binary options example

For example, if we invest $50 when the AUD/USD currency pair is trading at 0.71870 and select “HIGH” we will receive a payout of $92.50 if the price is 0.71871 or higher at expiry. We only need the very smallest movement (e.g. 0.1 pip) in price to be profitable.

The AUD/USD currency pair will typically move 50-80 pips a day, and on particularly volatile days (political events, data releases etc.) can easily move 200-300 pips.

Assets

Assets are all the financial instruments which are available to trade in the market. For example, currency pairs, commodities, stocks and stock indices. Here are some examples of each asset class:

Currency Pairs: AUD/USD, EUR/USD, GBP/USD, USDSGD
Commodities: Gold, Oil, Copper, Wheat, Coffee
Stocks: Google, Microsoft, Alibaba, Facebook, Citibank, Boeing
Stock Indices: Dow Jones (US), Nikkei (Japan), Hang Seng (Hong Kong), Shanghai Comp (China), ASX (Australia), FTSE (UK), DAX (Germany)

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Option Expiries

With binary options, we select how long we will hold the asset when we initially make the investment. In the example above for the currency pair AUD/USD we selected a 5 minute expiry, the contract is for five minutes. However we could have selected from many other time frames: 30 seconds, 60 seconds, 15 minutes 1 minute, 1 hour or even 1 day.

When our selected expiry time is over, our broker automatically closes the option contract and the payout is calculated. There are also a number of brokers who allow the option to be closed out early for a portion of the profit, for example HighLow Markets.

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