What are Binary Options?

Binary options as presently traded began in 2008 when it was offered on the Chicago Board of Exchange (CBOE) as a tradable asset in direct response to calls for the introduction of an alternative form of investment with reduced risk profile. This was after many traders lost colossal amounts of money in the events that led to the global financial crisis.

Binary options is basically a two-outcome trade type, where the trader bets on two possible outcomes (hence the name “binary”) according to the behaviour of the underlying asset.

History

The history of binary options goes back almost 40 years to 1973 when option trading was introduced on the CBOE, which had just commenced operations. Back then, binary options were only available to banks and high net-worth investors as an Over-the-Counter (OTC) tradable instrument. In those early days, an appropriate regulatory framework was lacking. This situation lasted until 2007 when the Options Clearing Committee (OCC), saddled with the responsibility of developing a regulatory framework for the options markets, proposed the introduction of binary options as an independently traded financial asset. The proposal was adopted by the Securities and Exchange Commission (SEC) and binary options became a standard, tradable financial instrument. By May 2008, the American Stock Exchange (AMEX) offered binary options to the public for the first time, and a month later, binary options became available on the CBOE. Over the years, binary option trading has become available for trading on online trading platforms.

Advantages

There are advantages to trading binary options. They are a less risky form of investment which can be easily learnt by newbie traders. The capital requirements are less, and traders do not have to deal with issues such as margin, leverage and issues with broker transparency in pricing. Moreover, several trade types exist, and it is possible for a trader to use a single trade analysis to get several profitable trade outcomes, potentially allowing the trader to compound his profits in ways not obtainable in other markets.

Forex vs Binary Options

A comparative analysis between forex and binary options will reveal some areas of similarities and differences. I really do not like to compare forex and binary options, as if trying to make one superior to the other. The truth is that forex and binary options complement each other, since currencies make up the bulk of assets traded on binary options platforms.

Indeed, traders who have some knowledge about how the forex market operates, its strategies and indicators, are more likely to succeed in binary options than traders who do not have such knowledge. Many trade types in binary options rely on technical analysis. If a trader cannot identify and interpret a rising wedge pattern on the EUR/USD, how is he going to be able to trade an Up/Down trade on the binary options platform for the same currency pair? Similarly, if the trader has no knowledge of pivot points or Fibonacci retracement patterns, how does he accurately predict when the price action of an asset will trade within a range or breakout of that trade (the basis of the boundary trade in binary options)?

Forex complements binary options. So everyone aspiring to become a binary options trader is encouraged to learn a little about forex. On this blog, you will see some strategies that we have used to pull off successful binary option trades, simply by conducting appropriate technical analysis on charts and currencies in the forex market, using forex platforms.

Going Forward

A few brokers have stepped up the game by providing a number of trading tools for traders to trade binaries. We have also seen the introduction of broker-specific smartphone apps that permit mobile trading. As time goes on, we will definitely see more trading tools coming on stream. Binary options trading has come to stay and traders can definitely take advantage of the opportunities it provides to make some extra money for themselves.

 

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