What is a binary option? Things investors need to know about derivatives in a hurry

In today’s world, investors are seeking new opportunities and financial tools that can help them achieve their goals. Binary options are increasingly gaining attention as an option. However, a clear understanding of what binary options truly mean is essential before investing.

What Do Binary Options Mean? Basic Explanation

Binary options are a special type of financial instrument whose value and returns depend on the movement of the underlying asset’s price. Examples include currency pairs, stock prices, or market indices.

Investors entering binary options need to predict whether the price of the underlying asset will rise or fall within a specified period. Once the investment is placed, if the prediction is correct, the option will be “In the Money,” and the investor will receive a suitable return, generally between 70-85% of the initial investment.

If the prediction is incorrect, the option will be “Out of the Money,” and the investor will lose the entire invested amount. The unique feature of binary options is the “all or nothing” payout—there’s no middle ground. The duration of these options is very short, ranging from 1 minute to 15 minutes, allowing investors to see their profit or loss immediately.

How Binary Options Work: Call and Put Options

There are two main trading formats for binary options:

Call Option: Traders expect the underlying asset’s price to go up. If the price exceeds the entry point at expiration, the trader earns a profit.

Put Option: The opposite of a call; traders expect the price to go down. If the price drops as predicted, they earn a profit.

For example, suppose the GBPUSD currency pair is trading at 1.3902. An investor predicts that within 5 minutes, the price will go up. They buy a Call Option with a $100 investment. The outcome can be twofold: if the price is above 1.3902 at expiration, they receive $185 (their $100 plus $85 profit); if the price drops, they lose the entire $100.

This mechanism makes binary options high-risk but also highly transparent because investors know their potential profit and loss before trading begins.

Are Binary Options Gambling or Investment?

This is a common question, as binary options involve clear betting and outcome structures.

The answer isn’t straightforward because the line between gambling and investing depends on how an individual trades.

If an investor trades randomly without a plan, proper money management, and based on greed or fear, it can be considered gambling.

However, if trading is based on a clear plan, analysis, risk management, and calculated risk-reward ratios, the situation is different.

The key is that investors must genuinely commit to learning and developing their trading skills, not just hoping for wins or losses.

Legal Status of Binary Options: Perspectives from Different Countries

Binary options are financial instruments involved in financial transactions, so they are subject to legal regulation. However, each country has different views and legal statuses.

Thailand: There is no specific law for binary options trading. Thai investors must bear the risks themselves. If issues arise with foreign brokers, legal recourse is complicated and costly.

Other countries: Many have a cautious stance due to concerns over high risks and fraud.

Australia: ASIC banned retail investors from trading binary options from May 3, 2021, after finding only 20% of retail traders could profit.

United States: The FBI has investigated and found most related websites to be scams.

European Union (ESMA): Announced a ban on marketing and selling binary options to retail investors from March 23, 2018.

Belgium: Banned binary options trading since August 2016 due to fraud concerns.

Canada: Banned advertising and sales of instruments with less than 30 days maturity.

Israel: The Securities Authority banned binary options, considering them gambling rather than investment.

Germany: BaFin plans to prohibit sales to retail investors.

Comparing Binary Options and Forex

After understanding binary options, it’s important to see how they differ from Forex trading.

Similarities

Both binary options and Forex are popular trading tools, accessible online, requiring minimal capital, and allowing speculation on price increases or decreases. Both have the potential for high profits if predictions are correct.

Differences

Trading hours and accessibility: Forex markets operate 24 hours a day, five days a week, due to global financial centers. Binary options depend on the trading hours of the underlying assets.

Instrument duration: Binary options are very short-term (1-15 minutes) and cannot be adjusted after trading. Forex has no expiration; traders can hold positions as long as they want.

Volatility and risk: Binary options have lower volatility and fixed returns. Forex is more volatile with higher risks.

Profit potential: Binary options typically offer 50-80% returns, while Forex can yield 200% or more with leverage.

Which to Choose: Making a Smart Decision

Choosing between binary options and Forex depends on your personal situation and goals.

Choose binary options if:

• You want to define your risk clearly before trading.
• You have limited time and want quick results.
• You are confident in your predictions with a success rate over 80%.

Choose Forex if:

• You seek potentially higher returns.
• You can manage risks well and have a clear trading plan.
• You have a longer time horizon and desire flexibility.

Binary options do not require frequent wins as long as each win yields more than each loss. Forex demands risk management skills and better timing.

Both have pros and cons. The key is to study and understand your chosen tools thoroughly before investing real money.

In summary, binary options are unique instruments with high risk. Success depends on knowledge, carefulness, and risk management. Whether trading binary options or other tools, continuous learning and evaluation are vital keys to long-term success.