A binary option is an option with just two possible outcomes: you win a predetermined amount of cash or predetermined asset, or you lose your entire investment. This is what makes them binary and sets them apart from all the financial options that are characterized by a continuous spectrum payoff.
A binary option is tied to some underlying security or index, e.g a stock index, an interest rate index, or a company stock. Your task when purchasing a binary option is to correctly predict the movement of this underlying security or index. Where will it be when your binary option expires?
A cash-or-nothing binary option will give you cash if the option expires in-the-money, while an asset-or-nothing binary option will pay you the value of the underlying security if the option expires in-the-money.
You purchase a binary cash-or-nothing call option on Company ABCD’s stock struck at $100 with a binary payoff of $1,000.
If the stock in Company ABCD is trading above $100 when your binary option expires (the maturity date) you get paid $1,000. If the stock is trading at less, you get nothing and has lost the purchase price of the binary option.
Please note that there are binary options where the payment for a win isn’t pre-determined in $/€/£ but is pre-determined as a consequence of the level attained by the underlying instrument or index at the time of maturity.
- All-or-nothing options
- Digital options (especially when tied to forex or interest rate)
- Fixed return options (FROs)
- Over/under options
Not really binary
Nowadays, you can also find options that are marketed as binary options even though they aren’t really binary. Instead of just having two possible outcomes (win or lose) these “binary” options will give you a part of the purchase price back if your prediction comes close enough. Typically, this type of “binary” option will give you somewhere between 15% and 25% of the purchase price back if you get close enough. So, you are still losing money, but not as much money as you would have lost with a real binary option.
Making money on binary options
One of the appeals with binary options is the possibility of making money quickly. Some binary options have a maturity time that is just 10 seconds into the future when you purchase them!
It is common for binary options to give you a profit of 85% when you are correct.
Example: You buy a binary option for €250. Ten seconds later, your prediction comes true, and you get your purchase price back and an 85% profit, i.e. €250 + €212 = €462.
Naturally, making well over €200 in profits in ten seconds on a €250 investment is appealing.
Where can I buy binary options online?
There are a lot of different sites available online where you can purchase binary options. As always, it is important to do your research and chose wisely. Visit BinaryOptions.co.uk to find the best brokerws. There are a few regulated exchanges where binary options are traded, but a vast majority of binary options are purchased outside exchanges. Web sites selling binary options can either be licensed or unlicensed.
One aspect that is important to check in advance is how your money will be stored by the vendor. Only deal with vendors that keep customer assets in separate accounts that are in no way mixed up with the company’s own money.
Examples of sites where you can purchase binary options:
- Banc de Swiss
- Banc De Binary
- Top Option
- Bloombex optioner
N.B! These are not recommendations. We have not traded on all of these platforms. They are just listed as a stepping stone for anyone interested in looking further into binary option investments.
The Cyprus Securities and Exchange Commission (CySEC)
The first EU MiFID-member to regulate binary options as financial instrument rather than lottery tickets was Cyprus. In May 2012, the Cyprus Securities and Exchange Commission (CySEC) announced that all binary option platforms operating in Cyprus must be CySEC regulated.
After binary options were regulated as financial instruments, CySEC started a campaign against unlicensed binary options traders. CySEC sent out press releases warning investors against binary options brokers TraderXP, NRGbinary (NRG Capital), PlanetOption and LBinary. CySEC also temporarily suspended the license of Cedar Finance, and imposed a penalty of €15,000 against ChargeXP, OptionBravo and ZoomTrader.
Malta’s Financial Service Authority
Malta is the second EU MiFID-member to regulate binary options as financial instruments under the MiFID.
In March 2013, Malta’s Financial Services Authority announced that Malta’s binary options regulation was to be transferred from Malta’s Lottery and Gaming Authority to Malta’s Financial Services Authority. This stance was confirmed in June the same year.
Malta-based providers of binary options must have a category 3 Investment Services license and conform to MiFID’s minimum capital requirements.