The flip side of Binary Options Trading
Sometimes we talk of technology or gadgets which are so advanced that they are simple. Binary option trading is so simple that it is advanced.
How does Binary Trading Work?
Essentially, you try to predict the movement, range or the position of a certain stock or an index at a given point of time. The future you are trying to predict may be even just ten minutes away. Along with you there are many other investors testing their predictive skills and placing their bets. If you believe the index or the stock is going to move up beyond a certain point, or be in a certain high range of price or will be rising you can place a ‘call’ order. And if your belief is the opposite then you can place a ‘put’ order. The host, or let’s say the house is the broker.
There will be stated rules concerning how much you win if you are right and how much you lose if you are not. The broker will declare his charges and commissions. You place your bet and wait till the expiry time, i,e the time upon which you had wagered. If the stock or the market is above or below the point you predicted you win or lose. The money you put in is either returned with your reward added or is forfeited. Some brokers may have the system of refunding you your money without any addition or subtraction if the stock or the index is found at the exact boundary level; neither above, nor below. The rewards may often look very lucrative. You may theoretically have the chance of doubling your money inside one day of trading.
Then why can Binary Options be Risky?
They can be risky because:
It has been calculated from real life examples that typically the rewards and penalties are structured in such a way that while looking attractive to the investor, they always ensure that on the whole the investors lose money.
One individual investor has to be right typically about 55 to 60 percent of the time to just break even. It is very common for investors to get hooked to this addictive game where results are published often even quicker than in a computer game.
Also, one never really gets ownership of any asset.
It is impossible to be sufficiently knowledgeable about the future of any market because there are factors which may be internal decisions of companies or governments which are revealed to shareholders or the general public without any lead up or warning.
The other underlying risk is the lack of regulation which plagues many of the online platforms for options trading. There is no government body protecting the interest of the retail investor.
So, while one may feel protected with the knowledge of the maximum amount he can lose, there may be hidden costs to pay from your winnings.
Thus in this hunting ground of stark black and white simplicity where there are only two possible outcomes, there are many hidden grey areas which any amateur investor should be wary of.