News & Analysis

Binary Options Trading

April 26, 2016

A relatively new trading instrument is gaining popularity among traders across the globe. It is called Binary Options or simply Binaries.

Though these trading instruments have been around in overseas markets (e.g. the UK and the US) for a while, they have only been introduced in Australia a few years ago. And even then, they have not been actively promoted or marketed compared to foreign exchange (FX) or contracts for difference (CFDs).

However, the past couple of years has seen massive growth in the popularity of binaries in the UK, Europe and the US. In Australia, there’s also a growing interest in this product matched by the coming of companies that provide binaries trading platforms.

Before we go any further, let’s get down to the basics of binaries. Binary options are different from traditional options. If traded, one will find these options have different payouts, fees and risks, not to mention an entirely different liquidity structure and investment process.

One way to describe binary options (binaries) is to differentiate it from regular options. Let’s have a look at some of the differences.

Point of difference Regular Opitions Binary Options (Binaries)
Expiration time (expiry) » Weekly, monthly or longer » From 1 minute to 60 minutes
Payouts » Per contract and depends on expiry and strike price.
» Trader does not know in advance how much can be won or lost because of unknown variables on the trade, but when buying options, the maximum loss is known in advance.
» Pre-set amount at risk.
» Trader knows in advance how much can be lost or won before entering a trade.

 

What are binaries?

Binaries are trading products that give access to the foreign exchange (FX) and commodities markets. With binaries, traders can speculate on the direction of a currency pair in shorter time frames. One of the main features of binaries is the shorter time to expiry when you enter a trade.

Unlike regular options (on equities) that have longer expiry periods, binaries have much shorter expiry period that can range from 1 – 60 minutes as indicated in the table above.

The shorter expiry period is one of the main attractions of trading binaries. This means that even if you only have a few minutes – say for example a 15-30 minute break during the day – you can open a trade using binaries and close it within that time frame. For those who don’t have a lot of time to spend monitoring the market or any specific trade, the short expiry period would be ideal to capture short-term market movements.

Up-Down binaries

While there are several types of binary options (binaries), the most common and most popular among many traders is the High-Low (or Up-Down) binaries. What makes this type of binaries attractive is the relatively simple way of how it works.

GO Markets only offers UP-DOWN binary options trading. With GO Markets, you can trade binaries on 30 currency pairs plus gold and silver.

With High-Low (Up-Down) binaries, a trader is only speculating whether the price (of the binaries) will be higher or lower at the time of expiry. The trader does not even have to know the exact price at the expiry period.

For example, a trader opens a binaries trade on the AUD/USD when it was at .7755. The trader believes that the pair will go higher, therefore decides to go for a High (Up trade) and selects a 15 minute expiry. At the end of the 15 minutes the AUD/USD pair is trading at .7766, which is higher than the entry point (.7755). So after just 15 minutes this hypothetical trade has resulted in a profit. Had the AUD/USD finished below .7755, then the trade would have resulted in losing the initial outlay.

Here’s another example of how the Up-Down binaries work.

Say that the EURUSD is currently trading at 1.13634.  You believe that after 60 seconds the price will be higher than this level. You open a trade of $100 by choosing an “UP” trade (option). If you are correct, you will gain 80% of your initial investment (or $180).

However, if your view is incorrect and the market falls below 1.13634, you will lose your whole initial outlay of $100.

Small starting capital requirement

Another attractive feature of binaries is that it requires a relatively small starting capital.  This is another feature trader’s love about binaries. It enables you to get started with trading the market on a short time frame, with a small capital outlay.

Know the risk and reward upfront

Proponents of binaries also point out one major advantage of this product is the fact that risk and reward are known even before you enter or open a trade. This is because as a trader you can nominate how much you want to put in or risk on a trade. Some traders may want to put in $20, $50 or $100 on a trade.

And depending on your choice of expiry period, a trade may generate from 75 – 80 per cent return.  Again this may vary and will depend on the time frame you choose to trade over.

When it comes to binaries, there are only two outcomes you need to be focused on: you either win a fixed amount or lose a fixed amount.

And as a binaries trader, the primary decision or consideration to make is: is the underlying instrument going up or down at the end of the expiry period?

Having said that, traders need to pay close attention to:
»  payouts and risks;
»  how expiry prices are calculated; and
»  what happens if the option expires directly on the strike price.

So long as you understand the nature of binary options and are not under the expectation you are going to be swimming in a literal pool of cash from trading them, then the product itself actually provides an opportunity, unlike normal CFD trading.

Veteran traders aren’t interested in the Binary Option concept but many newbies seem to gravitate towards them. The reason for that is the simplicity of the product. If you have a spare 5, 10, 30 or 60 minutes, you can allocate a small portion of money to the trade and literally speculate on the direction after the set time frame.

The nature of Binary Options brokers

The very nature of Binary Options is that you are taking a punt on the direction of the instrument you are looking at and trying to predict if it will be higher or lower after a set time frame. Local regulators such as ASIC and the FSA have done a great job in ensuring CFD, Forex and Binary Options companies are not able to promise the world or suggest they are a potential path to riches.

Binary Options on the MT4 Platform

Most trading platforms that are designed for binary options trading are web-based.  However, GO Markets is one of the few brokers to provide binary options trading on the MT4 platform. This is made possible by a ‘plug-in’ that allows traders to trade FX, CFDS, Commodities and Binary Options all from the GO Markets MT4 platform.

There are two main advantages of trading binary options on MT4.

The MT4 is the most widely used trading platform in the world.  Most brokers who have their own proprietary platform, usually have the MT4 as a secondary offering due to its popularity.  As a result, most traders have some experience with the platform.  The familiarity allows traders to make the transition from FX trading to binary options trading a little easier.

By trading binary options on MT4, traders are not restricted to trading manually but are also able to use Expert Advisors if they wish to do so.

In addition, clients of GO Markets are able to trade binary options on a web-based platform and their mobile devices.

Returns on binary options trades

Let’s have a look at the returns on binary options trades.

The return on a successful trade depends on the time to expiry (contract maturity). For example, a trade with a 30 min to 1-hour expiry will yield 70% with percentage return increasing to 75% for a trade between 5 and 15 minutes. The highest return of 80% applies to a binary option with one minute expiry. Again, this may vary depending on your provider.

Generally speaking the lower the expiry period, the higher percentage return and vice-versa. As a longer time frame may have a higher probability of the target being reached, this is also reflected in the percentage payout.

Assessing the Risks on Binary Options Trades

Whilst binaries may be deemed as ‘limited risk’ in nature (given the margin required is the maximum you can lose), it in no way ‘limits’ the traders’ ability to take multiple trades and sustain multiple losses. As with all trading instruments, GO Markets encourage traders to carefully assess the risks associated.

How Are Binary Options Prices Derived?

Our binary prices are derived from the mid-point of our normal FX spot prices and adjusted according to the time until expiry.  It is important to note that other factors such as market volatility may affect the prices provided to you.  In addition, the price on which you deal is not governed by an underlying exchange or market but set by GO Markets.

Note: Because GO Markets sets the price, we cannot offset or ‘hedge’ your position in the same way we can across other trading instruments (FX, Commodities and Indices). GO Markets are therefore exposed to the outcome of your binary trade.

For example, when you enter into an FX contract, you are either buying or selling an amount of currency and paying a spread which is the difference between the BID and ASK price. With binary options, you are only speculating on the direction of a pair and not trading any amount of currency.

Why Trade Binary Options with GO Markets?
1.   Ability to trade binary options on MT4 and either trade manually or using Expert Advisors (EAs)
2.   Attractive Returns – receive between 70% – 80% potential return on successful trades.
3.   Multiple Expiry Times – Expirations of 1, 2, 5, 10, 15, 20, 30 and 60 minutes
4.   Low Commitment – trade from as little as $5 USD
5.   Flexibility – maximum trade of $250.  However, $500 trades acceptable on major currency pairs on 5 minute and above expiry times.
6.   Trade on 30 currency pairs PLUS Gold and Silver.
For more information, please contact support@gomarkets.com or call 03 8566 7680.

The opinions and information conveyed in the GO Markets newsletter are the views of the author and are not designed to constitute advice. Trading Forex and CFD’s is high risk. Please read our PDS documents and smart trader guide to ensure that you fully understand the risks involved.

Rom Revita's Profile Picture
Rom Revita  |  Sales Manager

Rom is the Sales Manager at Go Markets Pty Ltd and manages the day-to-day running of the Sales, Support and Marketing teams. He has been with the company since 2013 and is also one of our two appointed Responsible Managers, helping to ensure that the company follows all AFSL regulatory requirements.

Rom has extensive financial markets experience and originally comes from an equities & derivatives trading background. He has served on the Trading & Sales Desk with several large broking houses and now specialises in Margin FX and CFDs.

Connect with Rom:    romr@gomarkets.com