Types Of Available Binary Options

Binary options are one of the newest and hottest methods of trading the financial markets. Although binary options have been around since the beginning of market speculation they hae only recently become mainstream. Due to some changes in regulation and law enacted by the CFTC and SEC in 2008-2009 U.S stock exchanges were able to begin offering exchange listed binary options. Since then the industry has exploded with a growing number of off-shore, non-exchange listed binary options. What is the difference between the two and how does it affect you? The answers to those questions are numerous and I am here to help.

A binary option is a speculative trading vehicle with only two possible outcomes. A binary options will either close in-the-money (ITM) or out-of-the-money (OTM). If a binary closes ITM then the trader will profit the predetermined maximum amount. If the option closes OTM then trader will lose the entire investment. This is different from trading stocks, options or futures for one major difference. The values of these trading and investment vehicles is determined by the movement of the underlying issue as well as other market conditions such as delta, vega, theta and gamma. The value of a stock option is influenced by volatility and fear as well. If you have every traded a standard equity option you know that it is possible to be correct about market direction but still lose money on your trade. This is not possible with a binary option. If the option moves as you expect you profit, it's that simple.

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Regulation is a hot topic amongst binary options traders. The off-shore industry grew so fast in part because of the lack of regulation. Binary options allowed traders to access markets they were otherwise cut off from and were not bound by account rules such as margin requirements. Unfortunately the freedom that off-shore trading allowed for speculators also opened the door for scammers to come in and take advantage of unsuspecting new comers.

In 2012 the Cyprus Securities and Exchange Commission (CySEC) began regulating binary options brokers. The small island nation is a well known banking, tax haven and home to a large portion of the off-shore market. All brokers headquartered on the island are required to have CySEC regulation approval. Among other things CySEC regulation requires a certain amount of transparency in broker operations, segregated accounts for client monies and third part oversight. In addition to client safety CySEC regulation also allows binary options throughout the EU and friendly nations through European Economic Arena Financial Passport.

Other nations are also following suit. Japan's Financial Services Authority, for one, has enacted regulation for binary options brokers. Other forms of regulation exist as well including the Isle Of Mann GSC, which regulates gaming, gambling and casino's. While this type of regulation does offer some protection for clients it also keeps binary options on the fringes of the financial services world.

As for the United States, only CFTC SEC regulated binary options brokers are allowed to market, sell or otherwise engage in business with U.S. clients. Due to numerous complaints against poor binary options brokers the CFTC and the SEC have issued a joint warning against unregulated, off-shore, non-exchange listed binary options and have moved to block several from U.S. operations. It is illegal for off-shore, non-CFTC compliant binary options brokers to offer, market or sell binary options in the U.S. At this time there are only three exchanges currently operating legally in the U.S. This includes NADEX (The North American Derivatives Exchange), AMEX and CBOE binary options.

This does not meant that there are not any respectable binary options brokers out there. Two of the oldest and biggest brokers out there are also two of the best. Anyoption and 24Option both offer great binary options services and are both CySEC regulated. In my opinion there is no reason to use any other broker than one of these, unless you have access to NADEX.

The Option Builder is a feature that was first labeled by SpotOption but is not new to binary options. It is a twist on the standard high/low binary trade that allows traders to pick a risk reward profile from a list of choices. This means that traders can choose how much return they will get for a losing trade and how much they will get for a profitable one. Anyoption is one broker who has offered this type of fine tuning for binary options for many years. The Option Builder feature is useful for binary options hedging strategies.

High/Low, also know as Over/Under, binary options are the most basic and easiest to use of all the binary options types. This options is merely a choice of whether the underlying asset will move up or down from the current price before expiration. If you are bullish then you would trade a call, if you are bearish then trade a put. Trading is usually pretty simple, wait for an appropriate buying time, choose a direction and a trade amount then hit enter. With binary options trading there is no worry of strike price, delta or implied volatility. The strike price is the price of the underlying asset at the time of purchase and the asset is in-the-money if it closes in the direction of your choice. It does not matter what the asset does before expiration as long as it closes in the money you will receive the maximum payout. Returns range from about 65%-95% depending on broker, asset, expiration and other factors. Some brokers offer a small return on losing trades in the range of 5%-20%.

Range and boundary binary options are another twist on trading. These options take a position on whether or not an asset will remain within a range during the specified time frame. In order for this option to close ITM an "inside" range option's underlying asset must stay within the range for the specified time frame. For an outside range the asset must move outside the range before closing. There are some other twists on this type of option so be sure to check with your broker before trading. Sometimes the trade means the underlying asset will close above or beneath the range but not in it.

One Touch binary options are similar to high/low except for what is required to close in-the-money. One touch binary options require the price of the underlying asset to reach or exceed the set strike price only once during its life. These trades usually pay out a significant amount more than traditional high/low binary options. They also carry more risk. Because the options only require one touch to pay out the strike levels are usually outside the range you could reasonable expect an asset to trade in. However, there are some good uses for one touch type options. They are a great way to trade news announcements and other known events. Because of the high payouts they can also be hedged against each other to nearly guarantee profits from high profile market moving events.

Anyoption is one off-shore binary options broker that is offering 0-100 style binary options. They are constantly expanding the offering adding more and more assets all the time. This move by Anyoption is one step toward integrating the international binary options market place and one that I hope they keep building on. Other binary options brokers like CTOption are also in talks with U.S. exchanges and regulators in order to determine the best and most likely path for binary option integration with U.S. markets.

In the U.S. marketplace exchange listed binary options are a little different. These options are binary in nature but are tradable during their lifetime. Because of the way these options are structured it is possible to list options at different strikes. Traders are also able to sell CFTC certified 0-100 options creating credit positions. Each option is worth $0 or $100 at expiration. If it is in the money it is worth $100, if OTM is worth $0. While the option is open it is valued somewhere between $0 and $100 depending on the underlying asset and market conditions. Your profit or loss will be the difference between the price paid (or received) and $100. If you buy an option at $0.45 and it closes ITM at $100 then your profit is $0.65, or $65 per lot. If it closes OTM you lose the original $45. If you sell an option at $45 and it close OTM then you keep the $45. If you sell and the option closes ITM then you owe $100 and lose the difference between $45 and $100 or $65.

Exchange listed 0-100 options are available through NADEX and your regular option trading account. NADEX allows individual traders to join and trade directly on their exchange. They have a wide variety of international stock indexes, commodities, currency pairs and economic events. You can access CBOE and AMEX binary options through your options broker but not all of them allow binary trading at this time. I suggest using NADEX, I like it, I like it a lot.