18.02.2020
Many people compare binary trading with the Forex market. What is their difference we have already said. But the predecessor of the new method of over-the-counter trading is not Forex. Options trading has been around for decades. It was from this that the “binaries” we are familiar with emerged. Let’s try today to figure out the difference between binary options and classic options.
What are binary options in simple words
Let's look at it with an example. The euro now costs 90.44 rubles. I think that in an hour it will cost more than this amount. How much more expensive it doesn’t matter. I tell my broker (the company that executes my trading orders): “I bet a hundred dollars that the euro will go up in price.”
The broker finds a person who thinks that the euro, on the contrary, will become cheaper in an hour. And he also bets a hundred dollars on it. We make a "bet". Everyone bet one hundred dollars. We sit and wait.
An hour passes. The broker looks at the price chart. A euro costs 90.45 rubles. 0.01 ruble more than it was. I won.
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The man who argued with me gives the broker a hundred dollars. The broker keeps part of this amount (twenty dollars) for himself, and gives the rest to me. Why did the broker take 20% of my “winnings”? Because I had to find someone who would make the same bet as me, track the euro exchange rate, and write off money from the loser’s account. All these services are not free.
Result: my opponent lost 100 dollars, I earned 80, the broker - 20 dollars. All.
27.11.2020
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10 best binary options brokers today – platform ratings
If they existed, the world would be different.
How are options trading different from regular trading? Trading is when you buy some kind of financial instrument (the same euro, for example), wait for it to rise in price, sell it, and take the difference. The greater the difference in the buying rate and the selling rate, the greater your earnings.
An option is a “bet” with another trader. You make some kind of forecast, bet a predetermined amount of money and set a certain time when you need to check the result. When the time is up, you see whether your prediction was correct or not. If it is justified, you receive a fixed amount of money, if not, you lose your bet.
In an option, the following are known in advance:
- The amount of profit if your forecast was correct.
- The amount of loss if the forecast did not come true.
- The time after which the results are “summed up”: second, minute, hour, day...
Boundary or Range options
Another fairly simple type of binary options. The name speaks for itself. At expiration, the price must close within the selected range.
There is another tool - Out of Range. The point is clear - during expiration the price must go beyond the designated range.
In the case of a range, even if the price goes beyond one of the boundaries, it is not a problem if during expiration the price returns within the range. Everything is clear with the “Out of Range” option. The price during expiration should be outside the boundaries we specified.
The use of both tools is clear. “Border” is not used according to the trend - only in sideways movement, which is well described on the site. But for the “Out of Range” option, it is ideal to work with the trend.
Boundary or Range: Use
- Border: during expiration the price must remain within the range
- Out of range: during expiration the price must be outside the range.
Types of Binary Options
They are very different. Let's look at the six most popular types.
Higher lower
“Above/Below” contracts have the first place in any rating. You expect the price to be higher or lower than the current level. The example with the euro is just an example of a “Higher/Lower” option: one person thinks that the price will be higher than 90.44, the other thinks that it will be lower.
Here is an example - a chart of the euro versus the dollar. I think that the rate will still rise, so I click “Buy” and place a bet of one hundred dollars.
The deal is open, I see that the price is still below the original level.
Time is up. At the very last moment the price approached the level, but it was still lower, not higher. I lost a hundred dollars.
Touch
This is a forecast of whether the price will touch a certain level or not. Here is a chart with two levels on it. I can bet on "touching" any of them.
Let's say I'm betting on growth. If the rate on the chart after a given period of time touches the upper level or is higher than it, I will make money. If it’s lower, I’ll lose money.
You can also bet on the fall. Then you need the price to touch the lower level or be lower than it.
Range
A price range appears on the chart. If I assume that the price will be in a range after some time, I buy an option.
If at the time of expiration the price goes outside the range, that is, is above or below one of its boundaries, I will lose money.
Spread
About the same as touch. There are two levels, you need to choose which one the price will touch after a certain time.
In theory, this range should correspond to the real spread on the eurodollar currency pair, but for some reason on the chart it is a hundred times larger.
Express
This is when a bet is made on several instruments at once - which of them will rise and which will fall.
The income for each instrument is currently 70%. If all predictions come true, I will earn 243 percent profit.
Turbo
You need to guess whether the price will be higher or lower than the specified level in five ticks. A tick is one price change on the chart. So I bought a put option on the USD/CHF pair (dollar/Swiss franc), the price changed five times and turned out to be lower than the original level - I made a profit.
Please note that the percentage of profit in case of winning depends on the type of option and the market situation. In the Turbo category the profit is now 75%:
For “Higher/lower” – 70%:
According to “Range” – 85%:
Although last night options of this type for the same Eurodollar brought 95% (I duplicate the screenshot from the examples above):
The list, of course, can be expanded. There are other options for option contracts; their descriptions should be viewed on the website of the selected broker. All screenshots above are from the trading platform of the Alpari website. You can try trading there online on a demo account right now; you don’t need to register.
One Touch and No Touch options
In this type of binary options, we make a prediction that the price will touch a certain price during expiration. All we need is just “one touch”. No more needed.
The price has touched the support or resistance line - that’s it, we’re in the money. And it doesn’t matter at all where and how the price goes later.
No touch
The opposite situation is the “No Touch” option. Here we need the price to not reach a certain level. The same eggs, only in profile.
The second option, as you understand, is a little riskier. In the first case, if a touch occurs, that’s it, we’re in the money. What happens next during the expiration period is beyond us.
In the case of the “No Touch” option, we need to wait until the expiration time ends, and during this period the price should not reach the level we have chosen. This type of option is often used at the end of the week, when volatility is often low.
One Touch options are most often used when working with technical analysis patterns. Let's say, if you see a potential double top formation, then place a level at the potential second top formation.
Or you see that the price on all pairs is rushing towards the support or resistance line and intends to touch it. Great, “One touch” will help us.
But the No Touch option is ideal when there is low volatility in the market. The price is sluggish and unhurried. In Forex it would be useless, but in binary, with the help of “No Touch”, you can squeeze money out of it.
However, remember - once volatility rises and the price accelerates, No Touch becomes risky. That is why, when working with such an option, they prefer the Asian session and pairs like euro/dollar. In the evening Moscow time, the volatility of this currency pair decreases.
A popular use case for “No Touch” is in a sideways movement, after a strong trend. Or on a pullback movement after it.
One Touch/No Touch: Use
- One touch: in money if the price touches the level we have chosen during expiration.
- Without touching: in the money if the price does not touch the level we have chosen during expiration.
Pros of binary options
What are the advantages of binary options compared to other methods of trading on the stock exchange? There are three of them.
Fixed profit and loss. You know exactly how much money you will lose if your forecast does not come true. In trading, there are situations when traders leave transactions open over the weekend, and some serious political event occurs on Saturday and Sunday, the market turns over. On Monday morning, traders see that they not only lost money, but went into a huge minus and now have to pay debts to brokers. If you trade options, there is no such problem.
Income does not depend on the intensity of price movement. To earn a lot, you don’t need to “catch” big movements. You just need to make the right forecast. If the price is just a few ten thousandths higher or lower than the desired value, you will already make a profit.
Options discipline the trader. Eduard Sungatullin, a teacher of the “Basic Forex Trading Course” at Alpari, spoke about this advantage. When trading on the stock exchange, beginners often “twitch” - they are afraid of missing out on profits or losing a lot of money. Therefore, as soon as a plus is displayed on the transaction, they close it in order to “snatch” at least some money. As soon as a small minus appears, they also close it so as not to lose even more. In options, you won’t be able to twitch like that - there are predetermined amounts of “winning” and “loss”, and the time is also clearly limited. Sit and wait.
Which ones really work?
All types of binary options will actually work if you have the appropriate trading strategy.
Each type requires a trading technique; it will be difficult to optimize the trading rules of any one strategy for each type of BO.
You need to try and test which strategy will work best on a certain type of fixed contracts.
When trading, we recommend betting on stability, and leaving the pursuit of easy money to adventurers, none of whom will become a consistently earning trader in the future.
Cons of binary options
There are also three of them.
You may not guess the time. Timing is what makes options a gamble. In trading, you can use technical or fundamental analytics to predict where the price will go. Take a position in the market and wait for results. The price may reach the intended target at different intervals.
In the case of options, you are “guessing” whether the price will be in the right place after a certain time interval or not.
Most brokers offer options trading over short periods of time. In Alpari the maximum period is 1 day. This makes it impossible to trade using fundamental analysis, which is designed for long-term trading.
You are not buying any real assets. Even if you invest a million in options, you will own neither a share in the business nor a right to part of the income of that business. All you will have is your bet, which may or may not come true.
Most options brokers in the Russian Federation are illegal. They are registered in so-called offshore zones, for example, in the Seychelles. This means that if the broker deceives you, you will have to sue him, and the proceedings will take place at the place of registration of the defendant - that is, in these very Seychelles. Will you fly there to sue? Hardly.
The broker may independently close transactions at a loss to you. For different reasons. The broker can justify this by high volatility, due to which he did not close the option on time, by a technical failure, or by some other problem.
The Alpari broker documentation, for example, says:
“At the closest price” - what is the closest price? Especially when trading on news, when the market jumps up and down.
“All claims will be rejected” - you were directly told that you would not prove anything to anyone.
Profitability and taxation
Considering the growing number of traders around the world, as well as the presence of brokers on the market with a long history and excellent reputation, the question of whether it is realistic to make money on binary options has an affirmative answer. On the other hand, when starting to take your first steps in this direction of earning money, you should understand how much you can earn.
The minimum deposit with most brokers is $10, and the minimum bet is $1. The percentage of payouts for a successful forecast averages from 60% to 90% of the bet made. Moreover, the higher the risks on the current asset, the greater the reward will be. When calculating your potential profit, you should take into account that with a ratio of 50% to 50% of losses and winnings, you will certainly remain in the red. So, by making 10 bets of $100, you will lose $500, but at best you will win $450. This means that when choosing a strategy, it is important to achieve results so that the number of successful transactions is at least 60%.
If you make minimum bets and the income received is in the tens of dollars, the tax authorities are unlikely to be interested in your earnings. On the other hand, when withdrawing $1000 or more to a payment card, the state may require payment of 13% personal income tax. However, there is one more small nuance - you need to take into account the amount you deposited with the broker. So, if $2,000 was deposited during the year, but only $1,500 was withdrawn, you are not required to pay taxes (even if you still have the starting $2,000 in your current account with the broker).
Professional traders often register as individual entrepreneurs and pay taxes according to a simplified system. But a beginner can legalize his earnings from binary options by filing a tax return at the end of the year. To avoid paying taxes, many withdraw funds to electronic payment systems and then make purchases using virtual currency.
Options, Forex or stock market – which is better?
I have already compared options with betting on football. Forex is like betting on horses. You guess which horse in the USD/RUB pair (dollar/ruble) will come first - the dollar will cost more than the ruble or the ruble will cost more than the dollar.
When you invest in the stock market, you are buying securities. Pay attention to the word itself - “valuable”; they a priori have value. If you buy a share, you get the right to part of the company’s income (dividends) or to part of the property that remains after the company’s bankruptcy. If you buy a bond, you lend money to a company or state, and you receive the right to return it with interest within a certain period.
Your securities will not go anywhere because they are stored in a depository (read what this word means in a separate article). Even if the broker goes bankrupt, these securities will be transferred to another broker. You can't just sell your stocks and bonds without your permission.
The stock market allows you to buy real assets rather than betting and hoping to get lucky in a game of chance.
Moreover, the opinion of all experts is that the stock market is constantly growing in the long term. And the graphs confirm this. Here are the growth dynamics of the Moscow Exchange index from 1998 to 2020:
S&B 500 Index since 1970:
Here are the growth dynamics of American stocks over a hundred years:
The screenshots prove the promise of not so much trading as passive investment in the stock market, but this is a topic for a separate article.
Ladder
Binary ladder options are a fairly new type of transaction, somewhat complex at first glance. However, it’s enough just to figure it out.
Let's remember “Touch” options, where we need to predict that the price will touch a certain level. So, there are several of these levels in the ladder, and as you touch each one you get more and more money.
Let's say the price is at 106.425. The first level is 106.500, if the price touches it, the deal is in the money. It would seem that it is the same as “Touch”, but then the differences begin.
The deal indicates new levels, say, 106.550, 106.600, and so on - they are determined by the broker. If you choose a level that is further from the current price, the risks are significantly higher, but the payouts are many times greater.
This is, in fact, a variant of the “martingale” strategy from brokers. You must catch a very good trend for the price to break through these levels one after another. And then for 1 trade you can get, as you can see in the screenshot, more than 1000% profit.
The risks of this type of binary options are very high and I would not recommend using it. However, one cannot but agree that if you managed to “ride” a good trend, then after breaking through one level after another you will increase the transaction amount many times over.
I recommend using the ladder when strong economic news is released, when the price is guaranteed to show strong movement.
Option history in general
First, let's look at history. So, what is an option and how was it formed? Even in the ancient works of Roman scientists, it was indicated that the value of the cargo was established, and ship owners could exchange one product for another.
In the ancient world, options were purchased with olives. When the fruit was ripe, it was sold at a high price as a raw material for oil. Tulip trading in Holland was also carried out on the basis of options.
If we talk about the current stage of market development, it dates back to the 70s of the twentieth century, when options exchange No. 1 in Chicago began to function.
How to trade classic options
When the market moves towards the strike price, the option price goes up, but the further the market moves away from the strike price, the lower the contract price will be. In other words: the price of the contract is proportional to the risk. The lower the strike price, the less risky your investment is, but it also means your income will grow at a faster rate.
It is important to note that your losses are limited by the size of your investment, while your returns are unlimited. As long as the price moves in the direction you want, your income will increase until the contract expires, and the more it increases in relation to the strike price, the more income you are guaranteed.
For the first three months, this revolutionary trading tool will be available WITHOUT COMMISSION.
Types of Traditional Options
When contracts appeared and began to develop, their evolution began. Binary options are a subtype of traditional or classic contracts. In the modern society of speculators, binary options are considered a separate category.
Over the period of development, a whole classification of options has appeared; then we will consider the key types and subtypes.
By action
Depending on the right to a specific transaction acquired by investors:
- call – acquisition;
- put – sale.
Call options
The transaction to purchase the asset is being completed in the near future. The cost is fixed, the profit will be credited to the balance if the trader’s forecast is justified.
Put options
A transaction is completed, according to which the asset is given away at a set price. Party No. 2 undertakes to purchase this asset. Profit is accrued if the price of the asset has fallen and the agreed value in the agreement is above the fixed point.
By due date
Time period for transaction activation. Based on this agreement, they are divided into:
- short-term – less than one day;
- medium-term – from 24 hours to 7 days;
- long-term – over 7 days.
European option
The deal can be closed within the period specified in the agreement.
American option
This agreement can be terminated at any time. The goal of investors is to correctly predict the movement of an asset.
By asset type
Depending on what asset the investor is working with, options are divided into three groups. Further details about each.
Currency option
From the name it is clear that the underlying asset is currency. Traders among themselves call this type of contract Forex. But here you should not confuse Forex market instruments.
Profitability is calculated based on the difference in exchange rates between currency pairs during the period of completion of the agreement or conclusion of the transaction.
Currency options are considered the most optimal for those who are just starting to get acquainted with the field of trading.
Stock option
These are contracts in which securities are the key element of the agreement. Most often these are shares of corporations, firms, companies. The asset is suitable for traders with at least some trading experience behind them.
Commodity option
It is clear that here we are talking about working with goods or products. Most often, investors work with minerals and precious metals.
