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Binary Option Trading Tools

Updated on February 20, 2013
Binary options are the new wave in financial speculation.
Binary options are the new wave in financial speculation. | Source

Why Binary Option Regulation

Why is there a need for binary option regulation? The same reason we need regulation of any financial market, to keep traders and investors safe. Regulation makes trading binary options safe and it is helping to legitimize the industry. The benefits of regulation are:

  • Account Safety : Investor accounts are held in trust, separate from business funds.
  • Transparancy : Business operations, including trading platforms and financial standing, are out in the open.
  • Third Party Accountability : Brokers are required to submit to third party scrutiny. This helps ensure proper business practices and fair play.
  • Licensing : Brokers and services are required to obtain a license in order to operate.
  • Sanctions : Brokers, advisors and others subject to licensing are also subject to penalty and sanctions for non-compliance.

Binary Options Are Gaining In Popularity

Binary options have been around for over 100 years but are only now starting to really gain popularity. This is for a number of reasons. Primarily it is because of the internet. The internet has made trading stocks and options a reality for millions of people around the world. Another reason is the simplified pay out structure. Binary options are an all or nothing trading vehicle with only two possible outcomes.

The current binary options industry began to emerge around 2005 with the advent of online European style trading. These websites seemed to pop up out of nowhere and offered all-or-nothing trading without the regulation or capital requirements of futures or day trading. A few years later U.S. markets began to enter the scene. Regulation changes from the SEC and CFTC allowed the AMEX and the CBOE to offer a form of standardized binary trading.

  • European Style Binary Option - an all or nothing trading vehicle with only two possible outcomes, win or lose. Options are based on an underlying asset, the strike price is the price of the underlying at the time of purchase. Binary options pay a fixed return if options close in the money and usually nothing if the option closes out of the money. Each options costs the amount you want to pay at the time of purchase. If you want to trade $100, $2000 or $50 that is how much the option costs. This style of binary has expirations ranging from 60 seconds to end of the day, end of the month and others. Options must be held until expiration and are not liquid.
  • American Style Binary Options - an all or nothing trading vehicle with only two possible outcomes. The options are based on an underlying asset but are represented by a binary options symbol. Options prices are between $0.01 and $100. The price is determined by the price of the underlying. If your option costs $0.47 then you will win $0.53 if the option closes in the money. These options expire the same day each month as standard equity options, are tradable and liquid.

Binary Option Regulation

One of the biggest differences between U.S. and European style binaries, at least at first, was regulation. The European style binary options industry grew on the fringe of the investing world and was largely unregulated. This lack of regulation allowed many unscrupulous businessmen to take advantage of unsuspecting traders. Now binary options are recognized as financial instruments in the EU and are regulated by the Cypress Securities And Exchange Commission (CySEC). There is a growing movement among European binary options brokers seeking U.S. regulation.


What Is SpotOption

SpotOption is the current leader in binary options trading platforms. Not a broker or bank itself, SpotOption provides the trading platforms used by more than 80% of the binary options industry. The service is white label and allows brokers to provide customized binary trading through their own websites. SpotOption is a CySEC licensed market maker.

How To Buy High/Low Binary Option

This shot shows an order screen for a high/low binary option. You can see the entry level, the capital amount and the expiration.
This shot shows an order screen for a high/low binary option. You can see the entry level, the capital amount and the expiration. | Source

What Are High Low Binary Options

High/Low, or over/under, binary options are the simplest form of binary trading. Positions pay out based on whether the underlying asset closes higher or lower than the strike price. Remember, the strike price of a binary option is the price of the underlying at the time of purchase. If you buy a call on the S&P 500 when it is at 1400 and then closes at 1410 then you are in the money. If you were to buy a put in the same situation the position would pay nothing. This form of binary trading is available from virtually every binary options broker.

Trading high/low binary options is simple to do but difficult to master. Don't think that because the options are simplified that the trading is as well. It still requires an intimate knowledge of the market and a firm grasp on analysis. There are four steps to trading this style. Once a trading opportunity is identified traders enter an amount of money to be traded, pick a direction, choose an expiration and then buy the option. This type of binary option comes in calls and puts and have expiration ranging from 60 seconds to one hour, end of the week or several months out. Expirations vary widely from broker to broker so be sure to check into what yours has to offer.

One Touch Options Offer Bigger Payouts

One touch options offer bigger payouts but also come with bigger risks.
One touch options offer bigger payouts but also come with bigger risks. | Source

One Touch Binary Options Have Big Payouts

One touch binary options have big payouts but they also come with big risk. These options are how brokers can offer trading over the weekends. They are usually purchased when the underlying market is closed and pay out with only a single touch of the strike price. This is very different from trading high/low where the price must close above the strike price. With one touch the strike price is predetermined and is usually a fair distance away from the last closing price of the underlying asset. The reason they pay out such a high rate of return is because there is a very low probability of these options triggering a payout.

For instance, you choose to trade a one touch binary option on the S&P 500 after a close at 1402. The target strike price for the option is 1458, 4% above the current level. The expiration on the option is at the end of the next week. So basically what needs to happen is for the S&P to move up by 4% at least once during the week. There are other expiration periods for one touch but the one I have the most experience in is one week.

From what I have found the definition of a touch usually includes one daily close above the target strike price. This means that in order to profit from this trade the S&P would have to move at least 4% during the week with one close at or above 1458, in order to pay out.

Available Expirations From AnyOption

This shot shows the drop down menu with the available high/low binary options expirations from AnyOption.
This shot shows the drop down menu with the available high/low binary options expirations from AnyOption. | Source

What Is The Option Builder Tool

The Option Builder Tool is a feature brought to the market by SpotOption. It is a binary option trading vehicle that allows traders to customize their trading. The tool allows traders to pick a very specific expiration time and risk/reward ratio. What this means is that traders can lower the amount of risk associated with each trade (this in turns increases the amount of insurance or rebate on losing trades) and set expirations to coincide with specific events like FOMC announcements or earnings reports.

Expiration periods can vary but from what I have found they usually run about 24 hours. I found this to be very limiting because I rarely trade in the short of a time frame. Plus, the ability to reduce the risk/reward doesn't offer any advantages that I can see. If I want to risk less on a trade then I put up less capital. Easy Peasy.

Option Builder Offers Some Flexibility

The option builder tool allows some flexibility. This trade expires in 5 hours, all that is left is to choose a risk/reward from the drop down and then buy an option.
The option builder tool allows some flexibility. This trade expires in 5 hours, all that is left is to choose a risk/reward from the drop down and then buy an option. | Source

Binary Option Expiration

European style binary options expire in a different way than American style options. European binary options must be held until expiration, can not be traded once purchased and do not grant ownership rights to the underlying asset. Once a position is purchased it is held until expiration and only pays out if the underlying asset is in the money. At expiration binary options holders get the maximum return or the maximum loss, that's it, no other options.

Expiration periods can vary greatly from broker to broker but this is becoming more standardized. Typically brokers offer one or more these types of expiration:

  • 60 second - high/low binary options that expire 60 seconds after purchase. These are good for option scalping techniques and trading volatile news announcements. These options are among the most risky of the binary options.
  • Hourly/Intra-day - options that expire on the hour throughout the day or some other predetermined time. Some brokers have intra-day expirations every 15 minutes.
  • End Of The Day - binary options that expire at the end of the trading day. These can be purchased throughout the day up until the cut off time which is usually about 15-30 minutes before market close.
  • End Of The Week - options that expire at the end of the current week. These can also be bought throughout the week up until the cut off time. Not to be confused with a Weekly which could refer to an expiration on the same day Next Week.
  • End Of The Month - these options expire at the end of the current week. They are traded in the same manner as end of the week and end of the day but on a longer scale. Depending on what day of the month it is this type of option could be 30 days or 1 day so be careful when choosing this type of expiration. Most brokers are now offering expirations at the end of the next several months as well.

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