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What is binary options trading?

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  • What is binary options trading?

    Can anyone fill me in on binary options?

  • #2
    Borrowed from Quora but it gets the job done...

    Binary options for retail investors make a lot of money for the brokers or providers, rarely for the customers. The overseas versions differ from the US. Most customers are gamblers paying a house edge. A few customers do make money, but with the same skill and effort could make more money in mainstream products.

    On the other hand, there are real uses for binary options among professionals. These are longer-term than the retail version, and traded in ISDA accounts with major dealers, not small retail-focused shops or exchanges.

    A binary option is just a bet. The customer buys or sells an option on a specific future event, such as “the Dow Jones Industrial Average will be above 20,000 at noon today”. The option pays a fixed amount, say $100, if the event occurs. If the event is likely at the time the option is bought or sold, the price will be high, say $80 to buy/ $75 to sell. The spread between the buy and sell prices are why it's hard to make money. If the actual probability is 78%, you lose money on average buying or selling.

    An example of a professional binary option might be, “the average USD price of EUR in 2017 will be less than 1”. A company might buy the option because it's signed a contract with a European buyer with a dollar price that includes a 10% cut if the event occurs (this protects the buyer if the EUR is weak and the EUR price is too high). The US seller wants to remove this risk, so it buys the binary option.