A digital option is a financial derivative that derives from options that count among the exotic options. Often one hears of binary options, also called digital options, in a variety of contexts. But not always this term is clearly defined. Although high-yielding trading in small-scale operations entices even private investors, for whom the binary options market is predestined, should first gain a broad overview of the topic.
Digital options are gaining increasing popularity as trading tools. Many private investors rightly see the greatest possible profit potential in the stock market when trading foreign exchange. Nevertheless, not everyone can and does not want to deal extensively with the capital market and its individual facets. Therefore, constantly new products are developed, which are also suitable for beginners without any problems. Such is also the so-called binary options, which are released for digital option trading among private investors.
In principle, with the acquisition of digital options, you make a bet on a specific price of a financial product, the so-called basis. So he speculates on a course change or the direction of this change in course. In principle, all types of prices, such as commodities, stocks, currencies or other indices, may be considered as the basis.
However, a real share in Underlyings will not be purchased, in the case of a positive betting outcome, the trader will receive much more a fixed amount which is not subject to market price fluctuations, so binary options are stable in price behavior – unlike many other option products.
However, the analogy with sports betting can be drawn even further: just like there, investors can only lose or win. He either loses his bet or receives the previously agreed fixed amount. Binary options also owe the title “digital options” to this zero-and-one principle. However, there are also digital options variants with reduced risk: Here, the broker pays in the event of loss, a small part, usually about ten to 15 percent, the investment sum back. The disadvantage of this, however, is that the maximum achievable profits are smaller. Digital options are also popular, but especially because of the high profit potential of 70 – 90%.
The story of digital options trading
The history of the financial product is closely interwoven with the digitization of the brokerage market lately. Since the turn of the millennium, many transactions in the capital market have been conducted online, which has also enabled the development of new business models. Today’s binary options were virtually invented by American brokers/ traded on the market. The oldest and best-known derivatives mart, the Chicago Board Options Exchange (CBOE), started trading binary options. After the US Securities and Exchange Commission (SEC) allowed the derivatives, initially large banks, but later also increasingly private investors via brokers began trading in binary options.
How digital options work
The functionality of a digital option is similar to gambling. They can either only lose or win, so the outcome of the deal provides only two possible final states. This is already familiar from the digital technology sector. Here, there are only the values 1 and 0. In addition, binary options have their origins in the digitization of derivatives trading; This is where the name comes from digital options.
A trader thus sets on a certain course development. If he loses his bet, he loses; if he does win, he wins the deal and a certain amount.
Structure of digital options
Analogous to all other options, binary options (binary options) refer to certain underlyings, which are also called “underlying” in technical jargon. The underlying indicates what the price forecast actually refers to. In most cases, indices from the equities sector or prices of currencies, precious metals or even fossil fuels are used.
The actual binary option is nothing more than a forecast on the performance of the underlying. The underlying itself is not acquired, this is a significant difference to the stock market. Further, the starting point for a binary option is a so-called threshold to which the speculator refers to his forecast. The investor can – unlike stock deals – make profits even if prices fall, provided his forecast is correct.
The digital Options are so-called CFD trades, ie trades that value performance during the contract period.
Possible goals for binary options
price development:
This option predicts market price. A call option is a bet on a rising price, a put option is a speculation on a falling price. Price is the performance of a particular currency or commodity price.
threshold:
Here, the trader tries to predict whether or not a certain threshold will be affected by the price. If the threshold is touched, it is called a one touch, if the loss occurs, however, is spoken by a no touch.
value range:
The trader looks at a certain range of values and assumes that the price is within this interval (in-option) or possibly outside (out-option) when the option expires.
This brief summary of the main objectives for binary options clarifies the differences to traditional options. The clarity and simplicity of the goals eliminates the need for complex calculations, plots, and much expertise. Simple handling with high returns is comparatively easy to achieve with binary options.
Beginners should gather their first experience with the market with a demo account at one of the many providers.
Example of trading in binary options
The trader buys options at the EURO / GBP rate. The current price on day X at time t0 is 0.850. The threshold of the option is 0.860, it expires at time t1 on day X.
Now the trader can either put the call or the so-called put variant. In the put variant, the trader insists that the exchange rate is below the threshold value at the expiry time; in the case of the callout option, the trader forecasts the opposite situation.
If the purchase price of the option is an example of € 50 and the payout in the case of profit is € 100, the trader will receive a payout of € 2000, assuming a positive outcome with an assumed investment amount of € 1000. If the bet goes wrong, he loses his deposit of 1000 €.
Benefits of digital option trading
The comparably novel financial product of the binary option offers straightforward beginners all sorts of advantages:
- Potentially Big Profit
The profits are the most enticing. Profit margins of 70-90% are about the standard, here almost all other financial products lag behind in comparison.
- Limited risk
The risk is clearly limited to the amount invested, more you can not lose even in the worst case.
- Acting without experience
No comprehensive knowledge of the financial sector is required. For example, simple basic knowledge of the relevant subject area is sufficient for the bet on a price development.
- Low trading
sum possible The investment amounts have no high lower limits. Thus, binary options can already be traded in the two- to a three-digit range – a fact that further limits the risk.
- Short investment period
The investment periods are often kept very short, terms of a few days or even hours are the rule. However, there is hardly a binary option for more than a month. Thus, quick profits can be achieved.
- Good usability
Most binary options are traded on online platforms, whose operation is often very simple and convenient for the investor. Trading is possible even from a smartphone or tablet.
Disadvantages of trading digital options
Disadvantages of sharesTrading in Contracts for Difference (CFDs), foreign exchange and binary options entails high risks. Traders should be aware that trading is known as a “high-risk” money transaction. There is the possibility to lose a lot of money, even to the total loss of the investments made.
Only speculate with capital if you are ready to lose it. These forms of investment are not suitable for all investors alike. Also, past price developments are no guarantee for future developments.
Toll-free processing
Markets TradenAnother great advantage of binary options is usually free trading with them. In addition to the large profit opportunities, however, the loss possibilities should be illuminated. However, the risk can be optimally limited by modern trading methods.
Furthermore, many brokers such as 24option or anyoption have the option to get a gaming account. Here you will be provided with play money and can thus find out without any risk, which option trading he likes the most.
In addition, very many of the providers – if it comes then to the right options trading – the payment of bonuses on reaching certain investment amounts.
Which dealers are there?
Reputable rules and functionalityBinary options are traded outside the stock market as so-called OTC (over the counter) transactions. There are currently around 100 platforms worldwide for private customers to trade binary options. Recommended are for example BDSwiss , OptionFair, and Anyoption . Since the conditions such as maturities, yields and bases sometimes differ greatly, the comparison is worthwhile here.
Brokers also have binary options on all sorts of indices such as the DAX, TecDAX, Dow Jones, S & P 500, exchange rates, precious metal prices, oil prices, gas prices, etc. Even laymen, for example, can make big profits without much knowledge of the market with currency options.
The easiest way to do so is to first observe the market as a private investor and then decide on a trader. It is particularly interesting that you can act as a private person directly on the market without intermediaries.