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Binary Options in the UK
When it comes to traders using Binary Options in the UK, it is not exactly quite clear as to the regulatory and broker landscape.
Indeed, it was always quite muddy when it came to brokers in the UK, Europe and how the rules from countries such as Cyprus applied to the UK. This was made even more complicated by the recent exit from the EU on the Brexit Vote.
Although Trading Binary options in the UK can be done and through a number of brokers, only certain brokers are legally allowed to be offering their services to UK clients.
As a UK based trading community, the Binary Trading club knows the ins and outs of the regulators environment.
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UK Financial Regulations
The main regulator in the UK is the Financial Conduct Authority (FCA). They are involved with making and enforcing a number of the rules which dictate how financial services firms offer their services to clients in the UK.
The FCA currently regulates CFD and Forex brokers and these brokers would need to get a licence in order to be able to provide these services and claim compliance. The regulations are quite extensive for brokers including background checks on the directors, 500k in the bank account in reserve and a minimum number of staff. This is mainly as a result of the leveraged nature of those instruments.
Indeed, given how strict the FCA is when it comes to Forex and CFD providers, many of the largest online traders have decided that they would like to make the UK their base including IG and FXCM.
However, when it comes to Binary Options in the UK, the picture is slightly different.
UK Binary Options Regulations
The FCA currently does not provide regulations around Binary Options. They treat the instrument as an Over the Counter (OTC). Over the Counter is how Binary Options are traded by the big investment banks (self-regulating).
This of course leaves many Retail binary options brokers who offer their services to the UK client base wide open. However, given something called MiFid (Markets in Financial Instruments Directive), brokers regulated in Cyprus have been able to provide their services for Binary Options in the UK.
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This is because the MiFid directive allows financial intuitions that are regulated by an authority in an EEA (European Economic Area) member state to provide their services in to the citizens of another member state. This is termed financial “passporting” and has been used by a number of financial institutions across the continent.
As a result of tax savings and the relatively low cost of doing business, a number of brokers have chosen to use Cyprus as their EU country of choice. This means that the broker would have been regulated by CySec (Cyprus Securities and Exchange Commission).
However, with the UK choosing to leave the EU in June of 2020, this has also thrown MiFid regulations into some level of uncertainty. This is because the MiFid agreement was only to be implemented in the EEA of which it is uncertain that the UK will remain a member.
There are, however, a number of different brokers who have decided that they would still like to have some UK based regulation of their services. The other route that is sometimes taken is for the UK Binary Options broker to obtain a gambling license.
If the broker is to choose this route, then they would be listed as a gaming product or “fixed odds betting” rather than a financial product. Some brokers don’t approve of this for two reasons. Firstly, listing as gambling product rather than a financial one could tarnish the reputation of the instrument. Secondly, in the UK gambling debts are debts of honour which means that the broker has no right of recourse in the event of client losses and debts.
How Will this Change?
The current status quo is indeed not really here to last. More and more traders are aware of the fact that an FCA license is a great competitive advantage. It shows that the broker has some of the most stringent regulations in place for client protections.
Hence, there are a number of UK Binary Options brokers who have decided that they would like to apply for the FCA license irrespective of current Europe wide regulations.
Indeed even the FCA has decided that they need to get on top of the Binary Options regulations in the UK and have even suggested in a recent announcement that they are consulting with a number of different industries stakeholders about potentially regulating Binary Options in the UK.
This could be a good outcome for the entire industry as it allows traders to get a better sense of who they are dealing with. It could also give brokers more guidance around what would be allowed in the UK Binary Options industry and what would not be allowed. This is more certainty for the broker which is always welcome in the industry.
UK Trader’s Tax Obligations
Even though the UK regulations around Binary Options are not entirely clear cut at this stage, the Trader’s obligations around taxes and fees are. Any profits that are generated on Binary Options trading are taxed according to the Income tax requirements of HMRC.
This tax rate of course varies according to the income tax bracket that the client is already in. This can range from 20-50%. On the flip side though, losses that the trader incurs while trading Binary Options are of course tax deductible.
For most traders who are not trading full time, they will usually have to pay taxes through PAYE schemes (Pay as You Earn). If they are earning additional income from another source such as trading then they will need to pay tax on that if the income is above the allowance of £11k per annum. If the profits are greater than this in the year then the trader will need to “self-assess” and declare these profits.
Funding an Account
For UK binary option traders who wanted to open an account with a broker, there are a number of ways in which they could fund the account. These include bank transfer, credit card, Neteller and Skrill. Skrill is a UK based payment processor and usually has strict merchant account regulations in place.
Some brokers may charge you fees for deposits and withdrawals (on top of the credit card charges). You will need to take the time to read their Terms & Conditions to make sure you understand all of the fees involved.
Most UK brokers will allow the trader to hold an account in GBP should they have funded in that currency.
Regulated brokers also have strict requirements in place from their payment providers with regards to money laundering and fraud regulations. This means that the trader will need to provide documentation such as proof of residency and identity. Traders may also not be able to fund the account or withdraw profits from a separate bank account.
Which UK Brokers to Choose
When it comes to choosing a Binary Options broker in the UK, you need to make certain that you have ticked the right boxes before you can comfortably trade with one. There have been a number of UK residents who have fallen victim to illicit brokers because they did not do the adequate due diligence before investing. It is also really important that you find the broker that is right for you and your trading style. Below are some steps you can take when selecting a broker.
- Regulation: This is a stamp of approval that gives you certainty that the broker is indeed honest and that your funds are safe. It is also a way for you to filter out all of the binary option scams that are floating out on the internet. Make sure that you get the broker’s licence number and ask them to give you more information about the holding company. Cross reference this with a number of online sources to make sure that the broker’s claims are indeed honest.
- Technology: The broker’s platform is your tool to trade. Hence, you need to make certain that you have found a broker that has a platform that works well for your skill level. Some brokers such as IQ Option have extremely functional and resourceful platforms. These allow for more strategies to be implemented and technical tools to be used. Other platforms such as ETX Binary are more simple and better suited for traders who want a plain vanilla offering.
- Support: Lack of support is something that most traders find annoying. This could be in the form of customer support when it comes to admin questions or educational support for learning resources. Some brokers are better than others and you need to decide how important this is to you. Is it a deal breaker? Are you comfortable enough only having live chat or do you want a direct phone line in to the brokers?
- Payoffs & Pricing: This is something that can directly impact on your trading returns. The higher the payoff the more likely your trades are to end up in the money and the more likely positive gains are in the long run. Generally, any payoff that is less than 75% should be avoided as the risk and return is not justified. This is something that should be clearly advertised on the brokers website.
Once you have found the broker that you would like to use then you can start off. It is probably wiser to use a binary options demo account to make sure that trading these instruments is indeed for you. These are free and allow you as much time and demo funds as you like. Only when you are fully comfortable with the broker’s platform and all the other levels of support then you can move onto opening a live account. Make sure that you only ever invest as much as you can afford and have an effective money management strategy in place.
Binary Options Trading in the UK
Everything you need to trade binary options successfully.
Research. Find a broker. Trade.
For UK investors, trading with binary options is a tax free form of investment with very quick results – minutes rather than months or years. The word binary is used because there are just two possible outcomes – either the trade is successful, and the investor gains a significant return (usually between 75% to 95%) – or the trade is unsuccessful, and the full investment amount is lost.
During 2020 however, European regulators have prohibited the sale or promotion of binary and digital options to retail investors in the EEA. This includes the UK. Only professional clients or professional accounts are now permitted to trade binaries with regulated firms. A professional trader must meet 2 of these 3 criteria:
- Open at least 10 trades of ‘significant size’ per quarter (brokers define ‘significant’ differently)
- Own a portfolio or trading capital of €500k or more
- Have worked for 2 years in the financial industry, or have experience with complex trading instruments.
Unregulated firms may not adhere to the new ESMA rules, and will continue to accept UK traders. This does increase risk for the trader, and makes finding a trustworthy broker even more important. It is however, possible to find brokers regulated outside of the EU that will accept EU traders, and are still regulated by respected bodies.
So ‘binaries’ (or ‘digital options’) are a high risk form of investment, but that risk is offset by the potential for very high rewards with minimal waiting time. Most brokers are regulated, offering consumers the sort of protection they would expect while using financial instruments of this type. Returns from binary trading are also currently viewed as tax free by HMRC.
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What Are Binary Options?
Binary option meaning – Binary options are a derivative, traded on any asset or market. For example a stock price (Twitter, AstraZeneca etc), indices (FTSE, DAX, Nikkei), commodity value (gold, crude oil) or foreign exchange rate (EUR/USD, GBP/USD). Even cryptocurrencies such as Bitcoin or Ethereum can be traded.
The main difference between more traditional stockbroker trades, and binaries, is the clear identification of risk and reward before the trade is made. An investor knows exactly how much is at risk, and crucially, also knows the exact value of any potential returns. No calculator, formula, or maths degree is needed to work out profit and loss on a binary option.
This structure of the trades is what has led to the terminology of “all or nothing” , or “cash or nothing” being widely used.
The only decision for a trader is if the value of the underlying asset will rise or fall. The degree of the price change is not important. The trader is purely speculating on whether the price will be higher or lower than the current price, at a specific time in the future.
Short term price movement can be triggered by news stories or headlines, quarterly statistics, buyout rumours or even global security fears.
Trading binary options offers a Yes/No proposition. Although there are variations on the High/Low option, this type of investment will always have a black and white, Yes/No, binary outcome. Where trades can be closed, redeemed or sold mid-trade, payouts have absolute figures of 0 and 100 and prices move between as the market dictates – until closure.
Every binary option is offered with an expiry time. This is the point at which the trade will end. So the price at expiry is the one that will decide whether an option has won or lost (“in the money”, or “out of the money” in binary jargon). These expiry times can vary from just 30 seconds or 1 minute, (known as ‘turbos’), to a full day (‘end of day’), to even longer in some circumstances – rolling up to a full year.
Generally however, a binary option is used for short term trading – usually under 30 minutes (5 minutes are the most popular). Longer term expiries – and the element of fixed risk – does make them useful tools for hedging or diversifying other holdings.
Payouts change dependant on the asset and the expiry time. Differences can be significant so traders looking to use binary options long term, need to shop around to find the best payout for the asset class (or classes) they intend to trade.
Video Tutorial – Binary Trading Explained
Watch this video tutorial of the IQ Options platform, which shows how to place a binary trade:
Although binary trading is in a period of growth, it remains a relatively unknown product. Over time, this is likely to change. As digital options (as they are also known) offer a very simple fiscal arrangement. They are a legitimate way to play the financial markets.
Binaries offer a clear trading choice, but they are also high risk / high reward. There is however, no leveraged exposure with a binary trade, so the risk and reward ratio is also simple to manage.
Are Binary Options Safe?
Binary options suffer from a poor reputation. This is basically a result of dishonest and irresponsible marketing and cyber crime, more than an issue with the product itself. With tighter regulation, and a better understanding by the wider public, these options can – and will – move into the financial mainstream. Which was where they originally developed.
While FCA regulated agents and businesses may still have their flaws and faults, they are not fraudsters. The angry emails we receive focus entirely on unregulated brokers promising “easy money”, or a route to “get rich quick”. Read our section on avoiding scam brokers below.
Advantages Of Binary Trading
Many of the advantages of using binaries are related or linked. Here we list some of the benefits to using this form of investment – not just for the retail investor, but also to the market makers or brokers:
Managing risk when trading binary options is clear cut. The amount of the trade is the full amount that is at risk. This clarifies the risk not only for the trader, but for the broker too. Their pricing model reflects the accurate knowledge of their liability.
Trading Fees And Spreads
The certainty of risk provides a solid foundation for brokers to work within and manage. This leads to low trading feed, tighter spreads and higher payouts. To protect themselves further, they may use a liquidity provider or hedge their own positions. The expensive broker costs of clearing houses becomes unnecessary.
Leverage, or gearing, is not generally available with binary trading. This benefits the broker again, as it means all trades must be funded in full. In other words, no trader can default on a trade. With leverage, if things go wrong, there is a real risk of the broker not being paid. This is a big difference vs spot forex or spread betting.
Layers of complexity can be added to the standard fixed payout option. From a ladder option, to boundary trades or more advanced ‘nesting’ of options to create ‘strangles’ etc – binaries can be used in a huge variety of ways.
A binary trade offers the greatest level of flexibility. They even provide a mechanism to speculate on a market remaining flat, arbitrage, or to take a view on the trade volume of the underlying asset.
Robots and Auto Trading
Auto trading robots (‘bots’) often rely on signals and algorithms triggered by price graphs. Again, these robots attract many of the undesirable operators, and the automatic nature of the trades increasing risk further. New traders should be especially careful. A large amount of ‘due diligence’ is required when trying to find the right robot service.
An alternative approach is for traders to build their own robots using their own entry points. A growing number of brokers now offer traders the ability to put their own trading robot or program together, using simple tools. These hacks allow combinations of technical analysis settings, such as moving averages, Bollinger bands or RSI / MFI patterns, that then open trades when those criteria are met. It has made binary options ‘pro’ robots available to everyone.
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Binary trading itself is legitimate, and not a scam. There are however, brokers and signal providers that are untrustworthy and operate scams or frauds.
It is important not to write off the concept of binary trading, purely based on dishonest brokers. These fraudsters continue to drag down the image of this form of trading. Regulators, and rule makers are slowly starting to get to grips with these operations and the industry is being cleaned up. If you want to complain about an operator to our watchdog, please let us know via our Contact Us page.
Avoid scams with these simple checks
- “Make money online” or “Get rich quick” marketing. This is a huge red flag. Binary options are a high risk / high reward investment vehicle – they are not a get rich quick scheme and should not be sold as such. A “no loss” system does not exist. Operators making such claims are being dishonest. A binary options millionaire is almost certainly fake. The Brit Method is one high profile example – swerve it.
- Cold Calls. Reputable brokers will rarely make cold calls – they do not need to. Cold calls are from untrustworthy brokers. This could include email contact.
- Bonus Terms and Conditions. If taking a bonus, read the terms and conditions. Some terms include tying in any initial deposit or capital until turnover requirements are met. The deposit is still the trader’s money – honest brokers will not lay claim to it before any trading has been done. The better brokers will also offer the option of cancelling a bonus if it does not suit the trader. CySec, the leading regulator, has recently banned the use of deposit match bonuses as they believe it leads to clients ‘over-trading’.
- Account Managers. Be very wary of any account manager, tipster or ‘guru’ wishing to trade on behalf of clients. There is an obvious conflict of interest – they have jobs with the broker. These managed accounts generally encourage traders to trade with figures way beyond their means. This “upselling” is very harmful. The intensely risky Martingale system is a frequent tactic, and results in many quickly blown balances.
- Celebrity Endorsement. Sporting legends or team sponsorship is usually fine – and verifiable. Where this backing should worry rookie investors, is where the name of a mega rich billionaire or credible source is ‘pushed’ as a selling point. Warren Buffet, Richard Branson and Martin Lewis have all been presented as backing certain propositions when they actually have zero involvement – other than to sue the perpetrators for damages via a lawsuit.
- A trader must know their broker. Seems obvious – but some operators ‘funnel’ clients to a brokers of their choosing, not yours. If the merchant demands new clients sign up with a particular broker, or they pick the broker from a limited list – do not proceed. A trader should know the broker they are going to trade with!
Being aware of the above methods should help those new to binary trading to avoid the less responsible brands. Improved regulation and more awareness should hopefully reduce these types of complaints. This in turn can allow binaries to move forward.
Already fallen victim? The services of MyChargeBack.com might be of help.
The recent ban of binaries in the EU is ill-thought out, and could well end up pushing more traders towards scams.
Our strategy pages covers over 20 known systems, drawn from a range of forum and club chats, plus expert tips and advice. From high risk Martingale, to intricate systems like the Rainbow. We also cover more specialist subjects, like forex , technical analysis, the best price action indicators, trading signals and winning strategy. All this is aimed to help you gain an edge, and win.
Signals are an alert, sent to traders. They are designed as a trading tool, helping traders to spot opportunities. They can be communicated via a range of methods – email, SMS or from a live signal website or group. Much of the irresponsible marketing associated with binary scams is linked to signals – or auto trading robots utilising them. There are some very good providers out there too. However, in general, learning how to trade binaries is a safer route than using signals to compensate for a lack of trading knowledge.
Do signals work?
Sometimes, but rarely in isolation. Some providers deliver a combination of education alongside signals and that represents a good mix. Traders must be able to fully assess a signal before they can judge the quality of them. We also highlight some of the best providers on the signals page.
Brokers And Reviews
A binary option can be used in a number of ways, and across a huge array of commodities and markets. This means finding the best dealer, best account, or best trading platform, really depends on the needs of the individual investor.
For example, some brokers may focus on forex (foreign exchange) and trading the Japanese Yen, Euro or sterling. Others may be strong on commodities and only offer a handful of FX markets. Likewise, the returns (or payouts) may differ between asset classes, and with these varying by as much as 25%, it is easy to see the importance of making the right selection.
White label platform providers such as SpotOption, Tradologic or TechFinancials also dictate what products the host site can offer, so a proprietary broker with a bespoke design might be preferable. Payment methods merit some thought – if traders want to use Skrill, Paypal, Neteller or Wire transfer, they need to check the broker delivers that.
Mobile trading apps delivered by brokers or binary agents can vary in quality too. Some specifically program for the features of specific models, like iPad or iPhone. Others ensure cross platform compatibility, catering for android, blackberry and windows tablets and devices. Some traders may have tailored demands for any hand held app, others less so.
Trade size limits may point some investors either to, or away from, certain trading accounts. Some brokers offer minimum trades of just £1, while others cater for investors willing to invest £200,000 in a single trade. So every investor needs to consider their own trading style before deciding to open an account. Even working out the ‘cheapest’ broker is not as easy as it sounds.
How To Compare The Best Trading Platforms
Our comparison table delivers a quick summary of the key points when comparing brokers. Our detailed reviews then allow potential new users to assess some of the finer points that might confirm their decision. Here is a list of some of the vital comparison points for brokers;
- Over the counter or exchange traded options
- Minimum deposit (Plus deposit and withdrawal methods)
- Minimum trade / Maximum trade
- Trading platform
- News events feeds
- Asset lists (Extended lists might include ETFs, bonds and trusts)
- Charts / Charting tools (Graph types, forecasting tools)
- Expiry times available
- Regulation (FCA, CySec, CFTC etc)
- Range of options available (Boundary, Ladder, High Yield etc)
- Welcome Bonuses
- Complaints / Customer feedback
- Account Types and Benefits (VIP, Basic, Platinum)
- Plugins and Integration. (E.g. MT4 / MetaTrader4 / MetaTrader 5)
- Promo perks, Competitions, Leaderboards or Contest Prizes
Some points might be more important to certain traders than others. So finding the “best” will be an individual choice for each new client. A speculator taking a position on the monetary policy of the Bank of England or ECB might be best served by one broker, while the person looking to bet on growth in the Apple, Facebook or Vodafone share price might want another.
Most top brokers offer demo trading accounts. These allow new clients to try the services on offer. They can see if the range of markets and investment scales suit them and only proceed to a funded account when they are happy that the right trading account has been found.
Those brokers that do provide practise or virtual balances, have confidence in their trading platform. They are prepared to let new traders see it, and try it out, risk free. The review for each broker will include whether it offers a demo in the “Key Details” section.
What You Need To Know About Binary Options Outside the U.S
What Do You Need To Know About Binary Options Outside the U.S?
Binary options let traders profit from price fluctuations in multiple global markets, but it’s important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.
Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes.
The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors “to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.”
- Binary options have a clear expiration date, time, and strike price.
- Traders profit from price fluctuations in multiple global markets using binary options, though those traded outside the U.S. are structured differently than those available on U.S. exchanges.
- Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange.
- While typical high-low binary options are the most common type of binary option, international brokers typically offer several other types of binaries as well.
Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices, and expiry dates. Negatives include non-ownership of the traded asset, little regulatory oversight, and a winning payout that is usually less than the loss on losing trades.
Understanding Binary Options Outside the U.S
What Are Binary Options?
Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities, and foreign exchange.
These options have a clearly stated expiration date, time, and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, they are paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.
The binary options trader buys a call when bullish on a stock, index, commodity, or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time.
The broker discloses the strike price, expiration date, payout, and risk when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.
Binary Options Outside the US
Foreign Versus U.S. Binary Options
Non-U.S. binary options typically have a fixed payout and risk and are offered by individual brokers rather than directly on an exchange. These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an “all-or-nothing” payout structure.
Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).
The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008. The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC.
These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration.
They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.
High-Low Binary Option Example
Your analysis indicates the Standard & Poor’s 500 index will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis.
You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.
Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules.
In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment.
If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.
Other Types of Binary Options
The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well.
These include “one-touch” options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time.
Meanwhile, a “range” binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.
As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, the risk and reward is always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.
Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won’t lose their entire investment.
The Upside and Downside
Risk and reward are known in advance, offering a major advantage. There are only two outcomes: win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: Is the underlying asset going up or down?
In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.
On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses.
While payout and risk fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades cost the trader more than they can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.
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