A binary option is a type of option. They are also referred to as digital options or, perhaps more appropriately, all-or-nothing options.
Most commonly, they involve betting on the performance of two or more currencies in relation to each other. But aside from currency and shares, a number of other securities can form the underlying assets. Binary options are forward transactions (futures).
A simple either/or principle is employed, hence the term “binary”. The trader bets on a certain result (a specific rate change affecting the underlying asset) to be reached by a specific date. If the hoped-for results do not materialize by the given date, the investor loses the deposited assets. But if results on the specified date match predictions, the trader receives a predefined cash or asset amount.
When relating to binary options, a difference is made between binary cash options (cash-or-nothing options) and binary asset options (asset-or-nothing-options). In the case of a cash option, the trader receives a pre-agreed cash payout when the result matches the prediction. With asset options, traders receive either the actual underlying assets, or assets of equivalent value, when predictions and results match.
Trading in binary assets does not require a large investment of capital. Contract terms may be as long as 1 year or as short as several minutes. With profits of up to 90 percent, binary options are certainly a tempting investment. But the risk that comes with this form of trading is at least as high: investors risk the complete loss of invested assets.
Binary options are often traded over-the-counter (OTC) outside of the stock exchange, and trades are generally poorly regulated. Many trading portals are based out of Cyprus and Malta, and rely heavily on internet marketing to draw potential investors. Unfortunately, there are also a number of bad apples in the bunch which run fraudulent binary option schemes.
Binary options run by legitimate Swiss financial service providers are a safer bet, and are offered by Saxo Bank and Cornèrtrader, among others.
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