The binary options market is one of the most exciting and innovative markets in the derivative space, which have recently become available to retail investors. Binary options are all or nothing options, which use significant leverage which allows investors to reap 70-80 percent gains on each individual trades. For those who are new to this exciting market, we have put together the “five most important tips” that should be followed to achieve successful returns.
1) Understand the Binary Options Market and Products
Binary Options are considered “all or nothing” options which mean that an investor will receive a payout nearly 1.7 times the notional amount that is wagered or nothing. For example on $100 Call option trade in which S&P 500 moves higher relative to the strike price, the investor will receive back $170 dollars. If the S&P 500 moves lower, the investor will receive nothing (meaning the investor will lose the $100 dollars speculated). The returns are either a gain of a whopping 70%, or a loss of nearly a staggering 100% (in some cases the broker will return 15% to their clients).
Some binary options give investors the option of selling their binary options when they are in the money, but the majority of these options settle when the time of the option expires. For example, a daily binary option will have a specific expiration time/date, and the payout is not determined until the option expires.
2) Find a Reputable Binary Options Broker
Finding a reputable broker in this space takes time and research. There are many players in this new industry, and investors need to find brokers that have staying power and solid reviews. The brokers in this industry take the opposing position on each trade and “do not” lay off their risk. This means that the binary options brokers have a vested interest in their clients losing money. In most other retail industries (ie equities and forex), the brokers lay off their risk and therefore have a vested interest in their clients having more winning trades than losing and increasing the number of transaction they trade.
3) Find a Robust Binary Option Trading Strategy
To successfully navigate the binary options market, traders need to win more than they lose. A trader needs to win approximately 55% of the time to break even, which means the Binary Options Strategy that is employed needs to focus on winning more as opposed to gain more on each trade. Break out strategies are generally the best strategies to use as compared to trend following strategies.
4) Trade Daily Binary Options
In general, short time horizons work against traders. Hourly binary options (and shorter periods) work against an investor given that the broker receives a 15% commission in the form of a bid/offer spread (payout out 70% for every 85% wagered). With the odds stacked against the investor, trading daily or longer options with a robust binary options trading strategy gives an investor the best likelihood of achieving solid returns.
5) Have Realistic Goals
Binary Options are excellent trading tools, but they are not the panacea toward getting rich quickly. Binary options are simplified ”above or below” options in which an investor just needs to pick a direction, but underneath the hood, these products are relatively complicated and enjoy significant leverage. The key to success is to look for realistic returns, as opposed to earning 500% within 3 months.