Binary options give you the luxury of picking two options out of the lot; a fixed amount or nothing. Although this trading technique works differently depending on the country, you can learn how to make money with binary options online.
According to The Balance, no matter which binary options you trade—Nadex options or traditional binary options—”position size” is important. Your position size is how much you risk in a single trade.
So, although this article will show you how to make money on binary options, you will also learn the difference between a bid and an ask, and a lot of other trading strategies.
What are Binary Options?
Many traders fully understand how binary options work, what markets and time frames they can trade with binary options, the advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.
Binary options give you the ability to trade markets with known risk and profit margins. The only two options on the table make it easier for traders to make choices on their trading. The same rule applies to the different assets that traders trade.
Let’s take the following question as an example: Will the price of Dogecoin be above $1 at 1:30 p.m. today?
If you believe this will stand, you buy the binary option. However, if you think Dogecoin will be below $1 at 1:30 p.m., then you sell this binary option. The price of a binary option is usually set at $0 and $100, and like other financial markets, there is a bid and ask price.
In the market, there’s a constant fluctuation between the offer and the bid. You can choose to close your position before it expires to lock in a profit or reduce a loss, in opposition to letting it expire.
How To Know Your Bid and Ask Price
The market isn’t controlled by a singular individual or entity, but by the traders. The price depends on their understanding and assessment of any market proposition. For example, if the bid price and ask price for a binary option are at 87 and 91 respectively, then the general assumption would be a yes.
On the other hand, if a bid and ask price were close to 50, traders will not have the assurance that the binary will expire at $0 or $100. If it is at 10 and 15, then traders can believe the outcome will be a no and expire at $0.
Where Can I Trade Binary Options?
You can trade binary options for a range of markets, but this will depend on your country. Since our core focus is the U. S, you can trade binary options on the Nadex exchange – the first legal U.S exchange focused on binary options.
Nadex (North American Derivatives Exchange) provides a browser-based binary options trading platform wherein traders can use both a demo and live account or one of them. This platform provides direct market access to the current prices of these binary options.
You can also learn how to make money through binary options by trading on the Chicago Board Options Exchange. You would need an options-approved brokerage account to trade on this market using your traditional account.
How To Make Money With Binary Options
IF you don’t know how to make money from binary options, you will learn how it works within the next few sentences. And you’ll get to see examples of how the process works as well.
Of course, it’s obvious that every option retraces or shoots up to $0 and $100 respectively. In this sense, it makes it a zero-sum game wherein someone loses for you to gain and someone gains whenever you lose.
As a trader, your capital is up on their side of the trade. For example, if you purchased an option at $44.50, and someone sold you that option, your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. And the person you bought from incurs a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.
Let us draw this example from Investopedia which connotes:
- NASDAQ US Tech 100 index > $3,784 (11 a.m.).
The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 you sell at $74.00, or place an offer above that price and hope someone buys it from you.
You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.
You can create a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order called a ticket.
How To Choose a Binary Market
Nadex offers trading in major indices such as the Dow 30 (Wall Street 30), the S&P 500 (US 500), Nasdaq 100 (US TECH 100), and Russell 2000 (US Smallcap 2000). There are also global indices for the United States, Germany, and some other countries.
You can place trades on pairs such as EUR/USD, GBP/USD, USD/JPY, EUR/JPY, AUD/USD, USD/CAD, GBP/JPY, USD/CHF, EUR/GBP, as well as AUD/JPY. These binary options are extended to crude oil, natural gas, copper, and corn.
Staying updated with the news and latest trends is also important to determine when Federal Reserves will increase or decrease rates.
What Fees Do Binary Markets Charge?
Learning how to make money using the binary option would demand you make some investments for your trades while paying certain stipulated fees. On the Nadex contract, you enter the trade with $0.90 and exit at $0.90. Essentially, the fee is capped at $9 for 15 lots.
When you hold your trade until settlement, you will access the fee at the expiry period. However, if you decide to hold the trade till settlement and don’t run out of money, there won’t be an assessment of a trade to exit fee.
You can use many brokers to trade binary options on CBOE with each broker charging a commission fee.
How To Choose Trading Time Frame
A trader can take a pick from Nadex binary options in asset classes that expire hourly, daily, or weekly. Hourly options are perfect for day traders, who love working in quiet conditions to attain a profitable return if they are correct in choosing the direction of the market over that time frame.
At the end of every trading day, you won’t have access to daily options anymore. And this is vital for day traders seeking to hedge other stock, forex, or commodity holdings against that day’s movements.
Unlike daily, weekly options expire at the end of the trading week and are the core trades of swing traders and by extension day traders as the options’ expiry approaches each Friday afternoon.
Understanding Trade Volatility
Market volatility influences the processes wherein binary options to get priced. This is an essential part of learning how to make money through binary options.
For example, if the AUD/USD 138 binary has 1½ hours until expiration, while the spot AUD/USD currency pair trades at 1.3810. When there is a day of low volatility, the 138 binary may trade at 90. That’s because the spot AUD/USD may hardly move.
However, if the AUD/USD moves around a lot in a volatile trading session, the binary may trade under 90 because of the unassuredness in the market. When this happens, pricing shifts toward 50. And this is attributed to the binary’s initial cost of participants getting equally weighted.
Pros and Cons of Binary Trading
Unlike the actual stock or forex markets, where price gaps or slippage are a frequent occurrence, you can cap the risk of binary options. Hence, when you make money on your binary options, it’s not possible to lose more than the cost of the trade.
If you purchase a binary option at $20, it will either settle at $100 or $0, making you $80 on your $20 investment or losing you $20. This is a 4:1 reward to risk ratio, an opportunity you can hardly find in any market.
On the other hand, you cannot gain above a certain level. Essentially, no matter how much the stock or forex pair moves in your projected path, the most a binary option can be worth is $100.
Binary options work on a yes or no proposition. You determine your profit-and-loss potential through your buy or sell price, and whether the option expires worth $100 or $0.
You can trade make money and trade binary options in the U.S through Nadex and CBOE exchanges. Foreign companies soliciting U.S. residents to trade their form of binary options are usually operating illegally.
It is advisable to trade binary options with capital you can afford to lose, and trade a demo account to become completely comfortable with how binary options work before trading with real capital.