Binary options are an easy way to trade price changes in multiple markets in the world, but any trader will need to understand the risks and rewards of these often misunderstood instruments. Binary options are very different from the traditional options. When traded, you will find these options have different types of payouts, fees and risks, as well as an entirely different liquidity structure and investment process.
Outside of the US, Binary options traded are also typically structured differently than binaries available on the U.S. exchanges. When speculating or hedging is being considered, binary options are an alternative, but only if the trader fully understands the two possible outcomes of these “alternative options.” In June 2013, the U.S. Securities and Exchange Commission gave warning to investors about the potential risks of investing in binary options and even charged a Cyprus-based company with illegally selling them to investors in the United States.
Classed as exotic options and yet, binaries are extremely simple to use and understand. The most common binary option is the “high-low” option. A high-low binary option is also called a fixed-return option and has access to stocks, indices, commodities and foreign exchange. This is because the option has an expiry date/timeframe and is also called a “strike price”. If a trader predicts the market’s direction correctly and the price at the expiry time on the correct side of the strike price, the trader is paid a fixed return regardless of how much or how far the instrument moved in the predicted direction. However, traders who predict incorrectly on the market’s direction lose the vested amount.
“If a trader believes the market is rising, she/he would purchase a “call.” If the trader believes the market is falling, she/he would buy a “put.” For a call to make money, the price must be above the strike price at the expiry time. For a put to make money, the price must be below the strike price at the expiry time. The strike price, expiry, payout and risk are all disclosed at the trade’s outset. For most high-low binary options outside the U.S., the strike price is the current price or rate of the underlying financial product, such as the S&P 500 index, EUR/USD currency pair or a particular stock. Therefore, the trader is wagering whether the future price at expiry will be higher or lower than the current price.” (Wikipedia)
Outside the U.S., Binary Options typically have a fixed payout and choice of risk. These are offered by individual brokers, not on an options exchange. These individual brokers make their money from the percentage of discrepancy between what they pay out on winning trades and what they collect from losing trades. These binary options are to be held until expiry in an “all or nothing” payout structure with certain exceptions in some cases. Most foreign binary options brokers are not legally allowed to solicit U.S. residents for trading purposes, unless that broker is registered with a U.S. regulatory body such as the SEC or Commodities Futures Trading Commission and usually within the U.S. itself.
High-Low Binary Option Example:
“Assuming your analysis predicts that the S&P 500 is going to rally for the rest of the afternoon, although you’re not sure by exactly how much. You decide to buy a call option (binary) on the S&P 500 index. Suppose the index is currently at 1,800, so by buying a call option you’re wagering the price at expiry will be above 1,800. Since binary options are available on all sorts of time frames – from minutes to months away – you choose an expiry time (or date) that aligns with your analysis. You choose an option with an 1,800 strike price that expires 30 minutes from now. The option pays you 70% if the S&P 500 is above 1,800 at expiry (30 minutes from now); if the S&P 500 is below 1,800 in 30 minutes, you’ll lose your investment.
You can invest almost any amount, although this will vary from broker to broker. Often there is a minimum such as $10 and a maximum such as $10,000 (check with the broker for specific investment amounts).
Continuing with the example, you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiry determines whether you make or lose money. The price at expiry may be the last quoted price, or the (bid+ask)/2. Each broker specifies their own expiry price rules.
In this case, assume the last quote on the S&P 500 before expiry was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. Had the price finished below 1,800, you would lose your $100 investment. If the price had expired exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although each broker may have different rules as it is an over-the-counter (OTC) market. The broker transfers profits and losses into and out of the trader’s account automatically.” (Wikipedia)
The example above is for the most common type of binary option; a typical high-low binary option. Outside the U.S. International brokers will typically offer several other types of binaries as well:-
“one touch” binary options, where the price only needs to touch a specified price target level once before expiry for the trader to make money. There is a target above and below the current price, in which traders can pick the target they speculate will be hit before the expiry.
“range” binary option allows traders to select a price range the option will trade within until expiry. If the price fluctuates within the range selected, there is a payout. If the price moves over or below the specified range, then the investment is lost.
“Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices and expiry dates, access to multiple asset classes in global markets and customizable investment amounts. The negatives include non-ownership of any asset, little regulatory oversight and a winning payout that is usually less than the loss on losing trades when trading the typical high-low binary option. Traders who use these instruments need to pay close attention to their individual broker’s rules, especially regarding payouts and risks, how expiry prices are calculated and what happens if the option expires directly on the strike price. Binary brokers outside the U.S. are often operating illegally if engaging U.S. residents. Binary options also exist on U.S. exchanges; these binaries are typically structured quite differently but have greater transparency and regulatory oversight.” (Wikipedia)
Competition in the binary options industry is constantly ramping up, with websites offering more and more binary option products. While the structure of the product may differ, risk and reward is always known at the trade’s outset. Binary Options merchants providing trading online would usually work with an already established Binary Options platform and service provider. The four most popular platforms are:-
Tradologic
Tradologic has offered its binary options platform since 2008 and has become a leader in the binary options platform market. Tradologic has numerous brokers currently using its platform with the most popular being Option Bit, Ez Binary, OptionXP and XP Markets. This review will detail some of the features that each of these brokers has to offer. Tradologic has quite a few other white label customers around 15 altogether.
Awepay works closely with Tradologic and can assist merchants to get setup with a turn-key binary options white label solution, contact us to find out more.
Spotoption
Binary options trading have become increasingly popular in recent years and as such, there are an increasing number of platforms from which users can choose. One of the top platforms is that offered by Spot Option. Numerous top brokers that are currently using Spot Option platform includes: TradeRush, Banc de Binary, iOption, and TraderXP. The primary benefit of Spot Option’s platform is ease of use.
Tech Financials
Tech Financials binary options platform has become popular amongst a select group of binary options brokers. Among the popular brokers currently using the Tech Financials platform are 24Option, Options Click, and OptionFair. These sites use Tech Financials due to its ease of use, data feed and trading system, visual appeal for the trader, and wide variety of binary options types. With some brokers on the Tech Financials with Orca+ order routing you have the potential of 88% on some binary options where other brokers might offer a lower payout.
One of the major cons of the brokers that use tech financials software is the lack of assets available. The commodities available are really few compared to other brokers.
Markets Pulse platform is a robust system where the broker has complete control over the entire system. As opposed to many front end only brokers, the backend to MarketsPulse allows them to add assets or enter expirations in a timely fashion.
From their website:
“MarketsPulse specializes in B2B; meaning 100% of the focus is on technology, rather than competing with our clients by operating a retail trading sites of our own. Furthermore, the options platform was developed entirely in-house, so our platform stability and customer support levels are parallel.”
This is a big deal, because several software platforms do this. Markets Pulse remains independent of the brokers and doesn’t compete with them for customers.