What are Binary Options

Most people who see advertisements for binary options hardly ask themselves what an “option” is and why, by the way, it is “binary”. And most importantly – why do ordinary citizens need to know this strange expression, why does it get so much attention now?

As usual in the financial world, this is a story about money and its role in our lives. A veritable poem of hopes and disappointments, success stories and tragedies striking in their emotional intensity. Shakespeare would be pleased.

Binary options have experienced it all. A rising interest, enchanting fall and rebirth. Their reputation has ranged from “middle-class lifesaver” to fraudulent income and stock derivatives. They have always attracted attention, from regulators and gamblers to classic investors. Their capabilities are surprising to many. Many of them are swallowed up. Huge sums are won and lost.

Binary options as such – all-or-nothing options – appeared in 2008. At a time when the global financial crisis was spreading, new financial instruments began to appear, expanding the opportunities for stock speculators. While ordinary options – they are called “vanilla” – are very complex in their structure, binary options represent their extremely simplified version. Let’s talk about them.

How Binary Options Work

Essentially, when you buy a binary option, you are working on a hit-or-miss basis. Either the option “hits” – which means that for a certain period of time (called “expiry“) its price is higher or lower than the original one, or it doesn’t, and the value of the option is exhausted.

Schematically, working with options can be represented as follows:

How does it all work?

Don’t be fooled by the name “option”, which smacks of the stock exchange and all sorts of financial matters. On Wikipedia, you can read about options: “This is an agreement between the buyer of the underlying asset and its seller to buy or sell at a predetermined price in the future.” All this is wonderful – but only for exchange-traded binary options. And you know what? It doesn’t even matter to you. Binary options presented on the Internet are in no way connected to trading.

Both de jure and de facto, it’s just a financial bet. You decide that in 15 minutes the dollar/euro exchange rate will be more or less than it is now. Or that Google shares will fall. If you’re right, you’ll receive 80% of the income in a short time, for example 15 minutes. Compare this to betting on the outcome of a match or the horse that comes first. It’s worth remembering how much banks pay out per year on a deposit to understand why the binary options scheme has become so popular.

Binary options are linked to a variety of prices, also known as assets. These include currency pairs on Forex, shares on stock exchanges, various stock indices and much more. All a binary option does is allow you to earn from predictions about the prices of these assets.

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Did you correctly predict that Apple shares would fall in half an hour? Congratulations! With a payout of 85%, you’ll get $85 for the $100 you risked. In total, it was 100, you made 185 dollars for half an hour.

Simple, right? It would be – however, as you understand, in half an hour stocks can go up when you think they’re going down. So your $100 goes down the drain.

But how do you predict where the stock or currency will go? Does that apply to everything? Yes, millions of people in the foreign exchange and over-the-counter markets are doing just that. Another issue is that there are few successful people out there. As with any market, there are always winners and losers, but what makes trading good is that everyone has a chance here. The charts don’t care about your age, gender or social status. There are successful traders from 16 to 80 years old of any gender, physique and religion.

Binary options are constantly evolving, both exchange-traded and over-the-counter. Many new tools appear – 0-100, “one touch”, “border”, various “turbo” options and what you simply want to avoid. The latter are especially popular. People don’t like to wait, but here in 60 seconds you can get 80% of the payouts… Few people can stand it and fall into the trap of carelessness and excitement.

How to make money with binary options

Let’s see how Marcus (Victor) can make money with binary options.

Marcus has opened an account at a binary office and is looking with interest at, for example, the silver chart. Before that, Marcus read in the news that silver is in great demand, so its prices are rising steadily.

“Yes,” Marcus thinks. Why not make a forecast for the growth of silver and make some money out of it? But there’s more to the pitch. The broker has an asset like silver (this is the dollar rate for silver, the live charts show letters XAGUSD), whose price is, for example, 24,920.

Marcus uses the technical analysis from our school and, with its help, makes a prediction that in one hour the price will be higher than 24,920.

Why do binary options exist and who needs them?

It’s just a speculative tool. Almost everything people do in trading or with various binary companies is banal speculation and a simple game of odds.

Binary options are traded both on official exchanges – such as Binary OptionsE, Nadex, Cantor and CME, and on dozens of brokers that allow you to earn by betting on quotes. It’s the latter that you’ll be working with.

There are sports bets, where you bet on horses, and there are binary bets, where you bet on the exchange rate or on shares. Both are bets. The first is sporting, the second is financial. Everything is elementary, dear Watson.

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The payment mechanism in sports betting and binary betting is significantly different. But their “spirit”, the working principle – is very similar.

Why are binary options suspiciously “simple”?

When you learn how binary options work, it seems incredibly simple. How hard is it to predict how things will be in half an hour or an hour?

Only newbies think it’s easy here, you know why? Because the brokers make them believe so. Ask a professional trader about whether bidding is “easy” if you want to see how a person can be cheated.

The market is a living, breathing organism. And if you carefully follow the price path without opening trades, you’ll see how unpredictable the price can be. This is natural chaos, especially for the uninitiated. However, effective forecasting can be learned using exactly the same skills that stock brokers have been learning for decades and that we will also learn at school.

Who deals in binary options

The main audience for binary options is obviously newcomers who have only just heard about the financial markets. Forex seems complicated (and strange) to them, they didn’t grow up knowing about options and futures that are common on stock exchanges (it’s quite tough at first), and binaries are a very simple scheme. Two buttons, a price and the chance to win with your prediction.

And, of course, people are attracted by very good payout percentages, the opportunity to get 70-95% (and there are brokers who pay more than 100%) for a successful prediction. That’s all you need for an impatient greedy person.

We’ve explained everything about binary options brokers, but what about trading? Why did giants like the Chicago Mercantile Exchange (CME) add these binaries? After all, there are qualified investors there, not people who only heard the word “quotes” yesterday?

Exchanges try to provide investors with the maximum range of instruments available. And that includes… the weather. An example of binary options on the CME is below. This is a binary option on the hurricane index.

Hurricanes, options? Wow! Ah, yes. Think of a simple scenario. You live in an area where hurricanes constantly destroy homes. And you see the forecasters predicting that this year the hurricanes will be especially strong. Why not buy a binary option that there will be a hurricane this season and thus hedge your risks? The tornado demolished your barn, but you insured it with the option.

Yes/no, there will be a hurricane or not. Zero and 1, that’s the binary scheme. And the exchange simply offers this opportunity (and there are many weather products on the CME).

But that’s already an example of using real exchange-traded binary options to hedge risks. As a rule, this is used by experienced investors and companies.

Most traders see binaries as a banal tool for short-term speculation – and rightly so. I look at binary options that way myself and advise against it. It’s just a money-grubber and nothing more.

What does “binary” mean?

Why “binary”? Because:

• “All or nothing”;
• Yes/No;
• 0/1.

All of this is so-called binary logic, well known to us from arithmetic. Either the option is in the money or it isn’t. Aut cum scuta, ant in scuta.

So, “binary”. Of course, the guy who came up with the idea of simplifying traditional stock options to such primitivism should get a prize. After all, he gave birth to an entire industry.

How long have binary options existed?

How long has sports betting been around? And market rates? They’re as old as mammoth poop. If you read carefully about one of the world’s most famous traders – Jesse Livermore – you’ll discover that, before the Great Depression, the USA was full of offices… recording intraday rates on stock prices.

At the same time, the actual shares were not sold or bought, the legal status of these offices was very dubious. They simply made it possible to work with shares without buying them, according to the “I guessed / I didn’t guess the course” scheme. Livermore made his first money with them. Familiar, right? There’s nothing new about it. Almost 100 years have passed, but it’s still the same.

Binary options games are another reincarnation of this market, another product in the supermarket of all kinds of games close to the market. They last as long as people’s passion. The form may change, but not the content. As long as there is a market, there will be bets on prices, in one form or another, under various names. For example, binary contracts are now increasingly being called digital or fixed contracts. The essence is the same, only the name is different.

It all starts with the binary

After this lesson, the first section of the Binary Options School begins and I want to warn you about something. The aim of the first section is not only to introduce you to the binary options market, but also… to scare you.

Yes, yes, intimidate in a good way. That’s what I demand all the time and that’s how it should be. There are a lot of trading schools out there where beginners are brutally deceived by the apparent ease of profiting from the market. You must have come across them. I had a lot of problems with this when I started out. All the information had to be collected bit by bit, very carefully. I put something into Binary Invest that I lacked so many years ago, when there were only stereotypical advertising stories about winning a car a week later.

So, time after time, lesson after lesson, you won’t be given rainbow ponies, but an understanding of the difficulties, complexities and problems of this market. You will be constantly reminded that this is hard work, which requires perseverance, dedication and mental clarity.

This serves to increase your chances of success in the market. The basis is not just technical tools, but psychology first and foremost. More than 90% of binary options and Forex traders are left with nothing at the end of the year. That’s the reality, but they don’t like to talk about it. At the same time, newbies succumb to greed, excitement and stupidity. Because they get caught in primitive traps designed exclusively for novices. Because they don’t want to learn anything themselves, the desire for quick profits always wins out.