A binary option is a trading instrument that is a win or lose proposition. The two types of binary options are called cash or nothing or an asset or nothing option. Every binary option is based on three distinct elements and includes the prediction or forecast, the underlying asset and the binary option contract.
The underlying assets include stock, currency pairs, commodities and indices. Most traders choose to speculate in one area of the trading market, although there are those who prefer not to put all their eggs in one basket and invest in a variety of options.
The binary option operates on a contract basis and the trader decides what time frame to run the investment. Most platforms offer a contract time frame from one hour to one month, but there are some that offer contracts for as little as 5 minutes. It is necessary to always check the expiration time and date of the binary option to know when the contract expires.
Binary options work by the trader predicting which direction the option will go before the contract expiration time is up. The choices are the option will increase or the option will decrease in price before the contract time is up. An option predicted to increase will be a call option and an option predicted to decrease will be a put option. The correct prediction will be known as finishing in the money and generate a profit. The incorrect prediction will result in a loss and no profit for the trader.
With binary options, the trader can opt to cancel a trade before the expiration of the contract time. This is helpful if the option is not performing according to expectations. This may happen if the underlying asset is not moving in the predicted direction. For example, if the trader has chosen an expiration time of 120 minutes and the underlying option changes direction after proceeding in the expected direction for 115 minutes, the trader can cancel the trade to avoid losing the investment. Another example is if the option has steadily decreased, and you chose the loss option, but then suddenly changes direction, you have the opportunity to cancel out of the investment earlier.
Trading binary options is flexible and becoming the preferred method of building wealth. Developing different strategies to fit different scenarios will help the trader increase profitability. Trading management is just as important as financial management to keep track of their trades and win’s and losses.