An introduction to binary options

Fsp Invest, 28 Nov. 2013

Tags: binary options, what are binary options, trading, derivative instrument, what instruments can you trade binary options on, call binary option, put binary option

If you want to trade, but you don’t want to speculate on how much a share price or index will move up or down, then binary options could be right up your street. With binary options you just have to decide if the share price or index will more up or move down. Read on to find out more about binary options…

Binary options are financial derivative instruments. This means that binary options derive their value from an underlying share or index.

Single stock futures and contracts for difference (CFDs) are also derivative instruments.

You may be wondering where binary options get their name from. Well, it comes from the idea that you can either be right or you can be wrong.

The event either happens or it doesn’t.

So when you trade binary options, you are predicting whether the price of an instrument (for example, a share) will go above or fall below a certain price (the strike price) in a certain period of time.

Binary options are over the counter (OTC) futures. This means that they don’t trade on a formal exchange, like the Johannesburg Stock Exchange. There are market makers, such as Global Trader, who create a market for them to trade through.

What can you trade binary options on?

They get (derive) their value from underlying instruments. You can trade binary options on shares, indices, currencies, bonds and commodities.

You just need to check what your broker has to offer you.

Once you decide on what underlying instrument you want to trade, you have to decide what type of binary option to go with:
  • You would trade a call binary option if you thought the underlying price will rise.
  • You would trade a put binary option if you thought the underlying price will fall.
So there you have it, an introduction to binary options.

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