If you’re at all familiar with options trading, you’ve probably heard of binary options signals. Trading in binary options has become increasingly popular over the last several years, and for good reason. While it’s not for everyone, it can result in fast, lucrative investments.
Before we talk about binary options signals, however, I want to cover some of the basics behind binary options so we’re all on the same page.
What Is a Binary Option?
Binary options are options that have an either/or result. Either you profit at a fixed amount or you don’t profit at all.
That’s what makes them different from regular options trading and what qualifies them as a so-called “exotic” investment. It doesn’t matter how much a stock price moves in one direction or another. Your profit is all or nothing.
Some investors see binary options signals as somewhat unreliable, while others swear by them. I’ll help you make up your own mind by describing exactly how it works.
The important thing to remember is that it’s a highly risky maneuver. In some cases, scam artists have used it to bilk people out of money by setting up marks, and in some countries, it’s considered an illegal form of gambling.
However, if you’re able to master binary options, you can make a lot of money. The goal is to maximize your contracts at a decent stock price and with a narrow bid-ask spread.
What Is a Derivative?
A derivative is any investment strategy that’s based on an underlying asset’s value. In options trading, for instance, the option is based on the underlying stock price. That makes it a derivative.
The same is true for binary options. In this case, though, the factor considered is the direction in which the stock moves rather than how much it moves.
It’s kind of like gasoline, which is a derivative of crude oil. The price you pay at the pump should reflect the current market price for crude oil — though it’s sometimes a little off. Those two prices are inextricably linked from the people who extract the oil to the people who pay for gas at Exxon.
Binary Option Example
The reason people often equate binary options with gambling is that you’re making a simple bet. Will X happen at Y time?
For instance, let’s say that you believe Stock ABC will rise above $24 by 10 a.m. on Tuesday. You contract with another trader based on this prediction. If, at 10 a.m. on Tuesday, Stock ABC’s price is $25, you profit $75.
How? The binary option payout is typically between $0 and $100, with the latter being most common. If your option expires in the money — meaning you were correct — you profit the options payout minus what you pay for the stock.
Binary options that expire out of the money result in a profit of $0. You also lose what you pay for the stock — in this case, $25.
Binary options signals, which help traders find the best plays on the binary market, are all part of this game, but I’ll get to those in a minute.
Vanilla Options Versus Binary Options
Regular options trading is pretty simple, which is why investors often call it “vanilla.” You buy the option to purchase or sell a specific stock before a specific date in the future. You can either exercise the option (buy or sell) or let the option expire.
Typically, you exercise the option if the stock is in the money — meaning it’s at or above your predicted price — and you don’t if it’s out of the money.
Your profit becomes the value of the stock price at the time you exercise the option as well as the fee.
Binary options trading is much different because there’s a fixed gain. Again, it falls between $0 and $100, and you can always buy more than one option.
Let’s say, for instance, that you decide you want to buy two put options on Stock ABC. You stand to profit $200 if the option expires in the money. With each contract (or lot) you add, your potential profit increases accordingly.
What Are Binary Options Signals?
Binary options signals are trading signals that experts and analysts send out to retail investors who might want to capitalize on them. Binary options signals can also come from computer-generated recommendations based on previous price action and other economic indicators.
The theory is that your binary options have a greater chance of expiring in the money because you’re getting your information from a qualified source rather than making your own educated guess. It’s also an opportunity for unscrupulous promoters to take advantage of investors, so you have to protect yourself.
Remember that binary options trading is a zero-sum game. There’s no wiggle room. If you lose, the other person wins, and vice versa. Plus, what you win ($100) doesn’t change. The same goes for what you get if you’re wrong ($0).
If you’re listening to binary options signals, you can start to get a feel for which options are best for your trading philosophy and strategy. You might feel more comfortable trading options when they’re small-cap stocks because there’s less risk, for instance. If you lose, you don’t wipe out a majority of your trading account.
Should You Listen to Binary Options Signals?
The question isn’t really, “Should you listen to binary options signals?” It’s more, “Who should you listen to?” The problem is that investors listen to whoever screams the loudest, which results in huge losses.
When binary options signals come from qualified traders, experts, speculators, and analysts, they can prove highly lucrative, especially if they’re only available to a fixed group of people. However, if you’re taking recommendations from someone who simply blasts binary options signals across social media, you’re probably playing a losing game.
That’s because it’s easy to rig binary options by influencing the market, especially on small-cap stocks and in the FOREX market. Additionally, people will try to exploit every aspect of the finance market, including options trading. You have to know how to protect yourself.
Example of a Binary Options Signal
Binary options signals typically consist of the same information: asset, trade, expiry time, and expiry price.
For instance, if you’re trading binary options in the stock market, a trading signal might look like this:
Asset: Stock ABC = $40
Trade: Binary Call Option
Expiry Time: EOD
Expiry Price: $40
They can vary slightly, but that’s usually what you’ll see. Binary options trading exists in other markets, as well, from commodities to FOREX.
Binary options are traded on the Nadex and comes with opening and closing fees of $0.90 per contract up to $9. You can purchase 10 contracts, in other words, and still pay $9.
Additionally, there are different times. Some binary options expire hourly, while others expire daily, weekly, or even monthly.
Mitigating Risk During Options Trading
Options trading, binary or otherwise, incorporates certain risks. With binary options signals, you run an extra risk of taking bad advice from someone who wants to take advantage of you.
Make sure you’re trading with a reputable broker and that you’re not risking too much of your investment account on one play. You might feel really great about binary options signals, but that doesn’t mean you should exercise a put option on 100 contracts and clear out your account. That’s always asking for trouble.
If you’ve never traded before, try paper trading with binary options signals. See how they play out, especially if you’re relying on one source. Once you’re more confident, put real money in play to see how you do.
I’m a big fan of options trading. It’s a great way to hedge your bets and generate huge profits on single plays, especially if you’re buying multiple contracts.
Binary options signals can help you become a better trader, but only if you’re learning from someone who actually has solid information to provide. Fake trading signals can swindle even the most educated investor.
For trading recommendations you can trust, The 10-Minute Millionaire Pro is at your disposal. This subscription service teaches you everything I’ve learned about becoming a millionaire using options trading and other tactics, and I’m consistently proud of the people who write to me with stories of their success.
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