For a bit of a diversion from the standard stock and ETF trading topics, today we’ll talk about binary option trading. There are some pros and cons to discuss as well as why it’s beneficial to trade with regulated binary option brokers.
Binary Options Trading Basics
There are some times where you know something’s going to happen, it happens, and you’re sitting on a paltry .5% move in your equities account and wish you were either more leveraged. A popular trading option, especially in the UK is to use binary options. Binary options can be traded in any number of asset class ranging from virtually all major international stock indices to major currencies to commodities like gold, silver and oil. Binary options can be used to hedge something like your existing portfolio positions or even your personal or business exposure to swings in currencies or energy prices. Conversely, you can rely on binary options for pure speculation. For instance, if you know there’s a major presidential election coming up and you feel strongly about the winner, there are some past examples historically where the international equity market has crashed or rallied depending on the winner. While a stock or ETF play may have moved 3-5%, a binary option trade can move double digits easily within hours.
Based on the example above, if you already have a binary option account set up with a regulated broker, you can be ready to go and act upon an impending move in whatever asset class it is you’re interested in.
Binary option positions rely on leverage, so you can usually open a contract for a fraction of the actual capital deployed. This allows you to be able to diversify and spread your positions across various assets, similar to how a typical stock trader does in a portfolio.
The transaction costs for binary options are usually pretty reasonable as well, roughly on par with stocks, or sometimes even cheaper.
As with all investments, especially those that are less traditional, there’s no free lunch. There’s definitely a period of education and trial and error, where you could be subject to easy losses or emotional trading. That’s why it’s important to consider a mock account first or back-test some strategies you intend on employing before committing serious funds to your endeavor.
I would imagine trading binary options is no different than the rush that comes with stocks or equity options, futures or other fast-moving financial products. If you have the time, inclination and access to routine trading, it could be very easy to get sucked into a high volume trading regimen. I would suggest starting off slowly and having a strategy going in before just starting up in an open-ended fashion and seeing where your funds take you.