Glossary – All the terms you need to know when Binary Option Trading

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    Perfect For Experienced Traders!

What you need to know when choosing a binary option broker

In the binary market, many potential investors and novice traders face the problem of choosing a trading partner. Often it is difficult to quickly and correctly assess the professional level of the brokerage company and the effectiveness of cooperation with it. In addition, in the market, there are more companies that want to deceive traders and lead them to a loss of finances. Against this background, we offer a list of practical recommendations that will make it possible to make a choice in the direction of the most effective trading platform.

So, in order not to get on a fraudulent resource and start trading on a professional and secure platform with the best technical and financial conditions, it is necessary to pay attention to certain parameters of the broker’s work.

Regulator license

This is the main parameter for the security of your investment vehicles. First, the regulator is the arbitrator for resolving trade disputes between the trader and the broker of binary options. Secondly, the regulator monitors the transparency of the platform and the financial calculations of the broker. The availability of a marketing license at the broker completely excludes deception and allows traders to work in the mode of maximum financial security.

Efficiency of the terminal for trading

To effectively deal with options trading, any trader needs professional service. The problem is that most brokers still use obsolete and technically restricted trading terminals. Yes, at the dawn of the appearance of options, their functionality satisfied investors, but today with such terminals you will not earn much. Therefore, we choose a broker with a professional platform, preferably own development. Such services often have the most cool tools for market analysis and trading operations. For example, most of them offer their partners a terminal, which was developed by their own specialists. On a high-quality trading platform, traders can access these technical services and trading conditions:

– a set of technical indicators;

– graphical analysis services;

– a schedule with the widest and most functional list of settings;

– options in the mode of turbo and classic contracts;

– 80 financial assets of different directions of the financial market;

– non-stop trading mode;

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    BINARIUM

    Top Broker!
    Best Choice For Beginners!
    Free Trading Education!
    Free Demo Account!
    Big Sign-up Bonus!

  • BINOMO
    BINOMO

    Perfect For Experienced Traders!

– profitability of trade contracts to 87%;

– a wide range of analytical and ancillary services;

– Demo mode for using the terminal.

Using the services of such platforms, traders can work on any technical strategy and get the maximum possible amounts of profit from trading options.

Trading start conditions on the market

Safe platforms and professional brokers will not require large starting deposits from customers, because they are interested not in the investor’s capital, but in the trader’s turnover from which they receive their income. In addition, a quality broker will offer an optimal balance between the level of the initial capital and the starting value of the option, which will allow to correctly manage risks and capital. For example, most brokers set the level of initial capital at the level of 10 USD, and the starting cost of options is 1 USD. These indicators allow you to effectively and with relatively minimal risks start trading in the options market.

Reputation of the company in the environment of traders

Scammers are often successfully camouflaged for professional platforms, but their activities can not be hidden from a huge army of traders who share their opinions on special forums and sites. When choosing a broker, pay attention to customer testimonials. So you can determine the list of possible problems in the work of the company and be able to create an impression on the basis of the opinions of traders about the future trading partner.

Approaching the choice of the trading platform responsibly, you can become a professional trader in the binary market and achieve good results as quickly as possible!

“General Risk Warning: Binary options trading carry a high level of risk and can result in the loss of all your funds.”

Glossary

Glossary database does not contain any word or phrase that begins with the letter “GLOSSARY”.

This glossary contains definitions of the many terms, phrases and abbreviations used in the world of options trading and is a continual work in progress. To start using the glossary, click on the above alphabetical hyperlink corresponding to the first letter of the term you wish to understand.

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Nadex Binary Option Basics in the U.S.

The most common definition found for an option is that it is an investment instrument (generally a contract) in which a trader purchases the option to buy or sell the underlying asset. In layman’s terms, the owner of a stock writes a buy (call) or sell (put) option on shares of that stock; an options trader purchases the ability, but not the obligation, to buy or sell the writer’s offered shares. The writer is obligated to conduct the transaction if the trader exercises the right they purchased.

These options are then traded between investors, varying in price with the asset they are based on. Nadex binary options, however, have fixed payouts—this means the investor will receive either all or none of the profit—and are popular because they are relatively easy to understand.

Binary options have complications when purchased outside of the U.S. There is not as much regulation, opening the doors for fraudulent activities. Authorities advise staying away from foreign binary options presented via websites.   This means that if you want to trade binary options in the U.S., you’ll likely be trading “Nadex options.” Nadex is the primary binary options exchange in the U.S. Here’s a basic rundown of how these binary options work.

Binary Options in the U.S. (Nadex)

A Nadex binary option is a wager that the price of an asset will be above or below a specific price (called the strike price) at the time the option expires. For example, a trader would consider if the price of gold would be above a $1,550 strike price at 1:30 PM (the option expiration time). If the trader thought it would be, they would buy the option. If they thought it wouldn’t be above the strike price, they would try to sell any options they had.

Binary options are written for stock indexes, forex (currencies), commodities, news events, and bitcoin, with various strike prices and expiry dates or times. This makes them suitable for day traders and swing traders as they are geared towards the short-term.

The binary options are priced between $0 and $100. When the option expires, it’s worth either $0 or $100, depending on whether the underlying asset is above or below the strike price when the option expires. The price of the option is set by the buyers and sellers of the option contract and represents the approximate odds of the price reaching $0 or $100.

Binary options trading is much like visiting a casino, you are playing the odds.

For example, if the option is trading at $50, then traders view the odds of the option expiring at $0 or $100 as equal. If the option is trading at $20, traders view the odds of the option expiring at $0 as greater than expiring at $100.

You can buy, sell, close or hold an option at any time, at any price available, up until expiry. Should you choose to hold, the option will either be worth $0 (good if you sold options) or $100 (good if you bought options).

Maximum Profit and Loss

Profits and losses are created based on the difference between the expiry price, and the price at which you buy or sell the option.

If you buy an option—expecting the price of the underlying asset to be above the strike price at expiry—your maximum risk is your purchase price minus $0. For example, if you buy an option at $45, your maximum risk is $45 (you have risked the money you used to purchase the option). Your maximum profit is $100 minus your purchase price. In this case, your maximum profit is $55 (if the option maxes out).

Purchase Price Risk Expiry Price Max Profit Loss
$45 $45 $100 $55 $0
$45 $45 $0 $55 $45
Sell Price Risk Expiry Price Max Profit Loss
$35 $65 $100 $35 $0
$35 $65 $0 $35 $65

If you sell a Nadex binary option—expecting the price of the underlying asset to be below the strike price at expiry—your maximum risk is $100 minus your sale price. For example, if you sell an option at $35 your maximum risk is $65. Your maximum reward is your sale price minus $0; in this case $35.

Every dollar the option contract moves is worth $1 in profit or loss. You can buy or sell multiple options to increase or decrease your gain or loss. For example, if you buy three Nadex binary options at $40, your maximum risk is 3 X $40=$120 and your maximum gain is 3 X $60 = $180. Try to keep your risk on each trade to a small percentage of your account’s capital.

Capital Required

Each trader is responsible for providing the capital to fund their trade. If you buy an option at $50, your maximum risk is $50. You need to have at least $50 in your account to fund the trade. The seller of the option, also risking $50, must have at least $50 to fund the trade.

The minimum deposit required to open a Nadex account is $250 (for direct trade members), although no minimum trading balance is required once the account is open since you can only open positions if you have enough capital. 

FCM and Market Maker members are required to maintain minimum balances starting at $100,000 but have no membership fees. 

Trading fees are $1 per option to enter or exit, and a $1 settlement fee per option (if in the money) at expiry, depending on the order lot sizes. Lots of 1 to 50 are charged the fees, and lots of 51 or over are not. 

There is no charge if you are out of the money (out of the money means the strike price is above the market value, in the money means the strike price is below the market price). Fees are charged to enter and exit positions. If you hold an option until expiry and lose, you are not charged the exit fee. Nadex offers a demo account where you can try binary options trading risk-free.

Thoughts to Takeaway

If you want to trade binary options in the U.S., Nadex is the main place to do it. Nadex options differ from binary options traded elsewhere in the world. The structure is transparent, and each option has a price, underlying asset, and an expiry. At expiry the option is worth $0 or $100, creating a profit or loss for the traders involved.

Holding the option until expiry isn’t required. Buy, sell or close your options positions at any time up until expiry. You can open a basic trading account for as little $250, and there are no trading minimums except that you must have the capital available to cover the maximum risk on each trade you take.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Top Broker!
    Best Choice For Beginners!
    Free Trading Education!
    Free Demo Account!
    Big Sign-up Bonus!

  • BINOMO
    BINOMO

    Perfect For Experienced Traders!

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