Trading binary options basically comes down to this: correctly guessing which way the price of a stock or commodity will go within a specific period of time.
Think gold will trade higher in 60 seconds? You place a call. Bet Apple stock will drop in the same period of time? Place a put.
Here’s an example: If you think the price of gold will go up within a specific period of time (say, within the next hour), you would buy (call) the binary option. In this instance, let’s say you place a $1,000 trade.
If you do so when gold has a payout (also known as a position) of 80%—which constantly fluctuates—and you guessed correctly, then the payout is $1,800 (80% of $1,000 = $1,800). If you were wrong, you lose your original $1,000 investment.
As you can see, there’s a lot of money to be gained and lost when trading binary options.
Will Binary Options Make You Rich?
Binary options trading has only been available in the United States since 2008, although they’ve been actively traded in some segments of the EU for years, especially Cyprus (more about this in a second).
Ultimately, this means that many of the largest US-based brokerage firms haven’t jumped on the binary options bandwagon yet, so you’ll probably have to weed your way through a lot of unscrupulous ones before finding the right broker for you.
Despite this, binary options are certainly a legitimate way to make money—a lot of money, if you know what you’re doing. They basically only have 2 options, there’s very little collateral required, the contracts can be very short, and you won’t lose more than your original investment on any one trade.
What Should You Look Out For with Binary Options?
Binary options trading can be deceptively simple though, and a lot of newbie investors have lost thousands. There are even specific companies out there who prey on your lack of knowledge in order to line their pockets.
Pro tip: The Securities & Exchange Commission released a memo in 2013 warning investors to be wary of doing business with any binary options companies based out of Cyprus. Why?
Since they’re not based in the US, these brokerage firms aren’t registering their securities, which means there’s little-to-no oversight for these investments, or verification of their underlying value. In layman’s terms, they could be bogus and provide no hope for a return on your investment.
What’s the solution? If you’re thinking about trading binary options through a program you learned about online, research them at HighYa to know what you’re getting into!
Be on the lookout for: Promises of big money within short time periods; long, drawn-out presentations with very little useable information; and claims that you’ll gain access to “proprietary” software that does all the work for you.