You shouldn’t start trading with options until you have a good understanding of what you are doing. This is an interesting strategy to explore if you are looking for an easy way to make money on the stock market and want investments with interesting yields.
How Do Binary Options Work?
Investing in binary options means two things can happen. You can make the right call on the value of a security and will end up earning a set profit. If you do not make the right call, you will lose your original investment on the contract.
You can for instance place a call option on a stock that you believe will reach a strike price of $30 before the expiration date. The set profit of this contract is $200. You will earn $200 if the stock reaches $30 before the option expires. If the value of the stock never reaches $30, you will lose the amount you originally invested.
How Can You Invest In Binary Options?
You have to invest in a contract that will expire at a given time. Some contracts only last for an hour but you can find investments on and that last for an entire day or a week. Investing in a contract consists in making a prediction regarding how the value of the underlying security will evolve over the time-frame of the contract. If you make a correct guess regarding the value of the security increasing or decreasing, you will earn a set profit.
You would place a call option on a security if you believe that its value will increase beyond a certain threshold within the duration of the contract. If you think that the value of the security will decrease, you would place a put option. You will receive a payout if your guess turned out to be right when the contract expires. The amount you can earn varies from one contract to another but you will always know how much you can potentially earn when you place the call. Some options have fixed rates and give you the possibility to earn more.
Are There Any Risks Involved?
There are risks involved since you would end up losing your original investment if you do not make the right prediction. Anything can happen on the stock market and some things are difficult to predict. A stock that looks promising can quickly lose its value if the company makes an important announcement or if something major happens to this industry. You might end up losing money if you placed a call option because you thought this stock would gain value. You can also lose your investment if you placed a put option on a security that wasn’t performing well but that ended up gaining value.
There are risks involved with binary options just like with any other type of investment. Risks are easier to control since there are only two possible outcomes with these investments and you can be successful if you do your research and look for the right investments.
Should You Invest On The Long-Term Or Short-Term?
Investing on the long or short term is entirely up to you. Some traders prefer to look for shorter contracts so they can earn money right away. Some traders mostly focus on other types of investments and only ocassionaly invest in binary options.
Some traders consider binary options as a way of generating an income on the long-term. You can usually obtain detailed reports from your wikitrader software broker if you want to find long-term investments. There are different apps and software you can use to track market movements and find the best investments.
Binary options might seem complex at first but you will become more comfortable as you research this topic. Read as much as you can and try getting some practice with a demo account before you get started.