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What Are Binary Options?

Trading binary options is a little different than regular trading. With binary options you are answering a yes or no proposition about whether an asset will hit a certain price at a certain time. From the comfort of your living room, you can pay to place bets on the price movements of stocks, commodities and indices. It’s marketed as investing, but it can be more like gambling. In this article we’ll explain what binary options are, and the risks involved in binary options trading.

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Options: The Basics

Usually, when people think about investing they’re thinking about buying stock. When you buy stock, you become a partial owner of a company and you have equity. But there are other forms of trading that don’t involve actual ownership of an underlying asset. Options trading is an example.

In options trading, you establish a contract that gives you the “option” to buy or sell an asset (often a stock) at an agreed-upon price called the “strike price” on or before some date in the future. In a “call option,” you take the position that the price of an underlying asset will rise. You profit if your prediction is correct because you can buy stock for less than it’s worth. In a “put option,” you take the position that prices will fall. You profit by selling the stock for the agreed-upon strike price, which is now higher than the market value.

Related Article: Types of Bonds

What Are Binary Options?

Binary options trading takes regular options trading and tweaks it. With binary options, there are call and put options, but the time frame can be as short as ten minutes. You are choosing whether the price of an asset will be above a certain price at a specific time. They’re marketed as another form of options trading like the trading that goes on on major exchanges like the NASDAQ, but they can be pretty different.

With binary options, the buyer pays a fee to bet money. He or she bets that the price of a given stock, commodity or index will have increased or decreased by a certain time in the near future. If you bet wrong, you lose all or most of your money. If you choose correctly, you win some money. Unlike regular options, you must wait until maturity – you don’t actually have the “option” of buying or selling at any point between the initial contract and maturity.

Binary options are sometimes also referred to as “all-or-nothing options” or “fixed-return options.”

Online Trading Platforms

Some binary options are listed on registered exchanges or traded on designated contract markets that are subject to oversight by United States regulators like the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). But many are not. In fact, the SEC has issued an alert about fraudulent schemes involving binary options and binary option trading platforms. The SEC advises doing some research into any online trading platform before handing over any money or sensitive information (like bank accounts).

Related Article: 4 Key Investing Tips for Millennials

Bottom Line

Binary options are based on a yes or no proposition of whether an asset will reach a certain price at a specific time. There are plenty of websites that let people set up an account, pay their fees and trade binary options, but not all of them are regulated to protect you from fraud.  It’s important to do your research and also not to invest money unless you can afford to lose it.

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Photo credit: © iStock/olaser

Amelia Josephson Amelia Josephson is a staff writer covering financial literacy topics at SmartAsset. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.

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