Options are financial tools very widely used to speculate on a certain asset or as a bet-hedging strategy, reducing the risk on an investment. Essentially, options give the buyer the right, but not the obligation, to buy or sell a certain underlying asset at a fixed price (known as strike price) at any point before an agreed expiry date. Options that give the buyer the right to buy an underlying are referred to as ‘call’ or ‘up’ options, whereas options that give the right to sell an underlying are called ‘put’ or ‘down’ options. Most binary options are European style options, meaning the buyer can only ‘exercise’ an option at the agreed expiry date, but not before it. The buyer makes a profit on an option if it expires ‘in the money’, i.e., if the value of the underlying matches or exceeds the buyer’s prediction at the point of expiration.
An underlying can range from exchange rates, commodity prices, stock prices and various indices. For example, a buyer might choose to predict whether the JPY-USD exchange rate will attain a certain value over the course of an afternoon. As such, binary options give a buyer the ability to speculate on assets/rates in a short-term fashion. A relatively new financial tool, binary options have recently sparked a lot of excitement among speculator and stock market observers. They have cleverly managed to introduce some simplicity into an otherwise complex system, making the market more accessible to novice traders and providing a diverse, new tool for those who have been around the block a few times.
The enthusiasm of traders has drawn serious attention from national regulating bodies, and the Cyprus Security and Exchange Committee (CySEC) has been the pioneering European Union body to introduce formal regulation. The recognition of a body which is also a member of the Markets in Financial Instruments Directive (MiFID), in a country where most binary options trading platforms exist, adds significant certainty to traders that the rules of fair-play are being upheld. As a financial instrument that also appeals to new players in the market, formal regulation imposes transparency and accountability, both necessary to provide all traders an equal starting point and protection from fraud.
There is no denying that public opinion about binary options trading can be polarizing. However, we will provide you today the pros and cons of this form of trading in order for you to decide if this is something for you or not. If, after reading everything, you find yourself wondering that binary options trading is something you wish to be involved in, you can try and request for a free demo account. This way you can experience the trading yourself, and decide from there.
These are the main disadvantages or cons of binary options trading:
Most of the brokers you can find online are located in a different country. This is because some countries have more lax laws and regulations that is why brokers choose to operate and form headquarters in these places. We cannot say for sure when binary options trading becomes accessible in the country where you live.
Mostly in favor of your brokers. Current statistics would show that the odds are typically in favor of your binary options brokers, but as of late, the chances have already improved. Usually, with the 70% payoff ratio, you still have to win more than 50% of the time just so you can break even, and eventually earn a profit. This is the very same reason why many are still not hyped to join the bandwagon as they think playing roulettes would give them a much better chance of winning.
Tools used in trading need improvement. Many traders—both novices and veterans—wish more efficient tools to be available so they can trade with peace of mind. There are brokers that offer top-tier learning and educational materials to their customers. But some brokers do not even have any tools featured on their dashboards, which can be seen as brokers letting customers trade with zero knowledge.
Regulations have to be fixed. When binary options trading broke out in late 2008, regulations were still being tested on how they should really apply. Now, we have yet to see tighter regulations and unambiguous laws to be mandated to attract a steady percentage of consumers. For there are brokers that are in the business only to scam money out of some people’s account, trading with digital options has become more of a risk than an advantage for some. We recommend that a thorough research should be done first when choosing your broker.
Now, these are some of the advantages or pros of binary options trading:
Simple mechanics and high (and quick) payoff. When trading with digital options, you have the ability to earn more than 50% return in minutes. This earning is impossible in other types of trading, that’s why binary options trading is unique and is loved by many. Even if you incorrectly predicted the outcome, you still get a percentage rebate. Binary options trading does not confuse you to make many decisions. You only have to choose between two predictions: whether your selected asset’s price or value goes up or down. It’s that simple, and that’s why it is called binary!
Easy to do and understand. The way how binary options trading was create made it easy for beginners to trade without considering a lot of other factors and timeframes. When trading with digital options, you would not have to consider anything to leverage decisions. You can just check how well or how bad your asset did before, set your preferences and variables, and see how other traders do their trading. From there, you can already make an informed financial decision.
Novice traders do not have to be nervous. In other types of trading, some beginners tend to get anxious when they close a position. But this is something you should not worry about in binary options trading since opening a certain position in many types of investment is fairly easy. You only have to know the right time to actually sell.
Risk is properly managed. If you are someone who is under the impression that binary options trading is at high stake, then you are wrong. Risk management is not going to be a major issue since you get to set and choose your own level of execution and tolerance. Brokers, on the other hand, will give you differing rebates depending on how close you got with your prediction.
Learning more about the industry gives you an edge. While it has been mentioned that some brokers do not offer reading materials on their sites, some brokers that have these educational materials ready must be consumed always. It is best that you read as much as you can so you can make more confident trades in the future. Some brokers, especially those who have been trading for a long time, offer advanced tools and features to traders so they can step up their games.