It is estimated that there have been over 100 different platforms offering non-exchange binary options trading.Exchange traded binary options: In contrast with regular options, which have a fixed percentage payout, exchange traded binary options have a fixed payout with the price of the contract changing based on what traders are willing to pay. So if a standard 100 contract costs 40, the market believes the likelihood of that particular event to be around 40. Unlike non-exchange binary options, the exchange does act as a counterparty, but charges traders a commission for using the exchange.6Exchange traded binary options first came on the scene in 2007 when the Options Clearing Corporation proposed a rule change to allow exchange traded binary options. The SEC approved cash-or-nothing binary options in 2008, allowing binary options to trade through a number of regulated exchanges, including the CBOE, AMEX and NADEX. US financial regulation prevents off-exchange option trading, therefore US citizens can only trade binary options via a regulated US exchange.Traders of binary options can register and trade only at regulated and licensed binary options brokers. In order to for brokers to be able to operate in these countries, theyre obliged to apply for a trading license. A license will only be awarded to completely legitimate companies that exclusively offer safe and fair services. National regulators are extremely strict about supervising the online trading market because the state also generates taxes from this practice. The state can only levy taxes from legitimate businesses.7Abinary option(also called adigital option) is acash settled optionthat has a discontinuouspayoff. Binary options come in many forms, but the two most basic are: cash-or-nothing and asset-or-nothing. Each can beEuropeanorAmericanand can be structured as aputorcall.A Europeancash-or-nothing binary option pays a fixed amount of money if it expiresin the moneyand nothing otherwise. For example, a European cash-or-nothing call makesa fixed payment if the option expires with theunderlierabove thestrike price. It pays nothing if it expires with the underlier equal to or less than the strike price. Exhibit 1 compares the payoff of a European vanilla call with that of a European cash-or-nothing binary call:A Europeanasset-or-nothing binary option pays the value of the underlier (at expiration) if it expires in the money. It pays nothing otherwise. For example, a European asset-or-nothing call pays the value of the underlier at expiration if it exceeds the strike price. A European asset-or-nothing put pays the value of the underlier at expiration if it is less than the strike price.Exhibit 2 compares the expiration values of European asset-or-nothing put and calls:Issuers of asset-or-nothing options can construct the instruments by combining a cash-or-nothing binary with a vanilla put or call. A cash-or-nothing binary can bedynamically hedged, but issuers sometimeshedgewith acall spreadinstead. Either approach becomes problematic if the binary is at-the-money as it approaches expiration.Although traders can gain a great deal of profit from trading binary options, the reality is that there is still risk involved regardless of ones experience and with this risk comes the chance for financial losses. Yet, rather than just tally up the loss and move on, there are some alternatives that may make losing funds into a more positive experience.In many ways, calculating a traders gain or loss with binary options is much easier than doing so with investments in individual stock shares. Because profit or loss depends simply on the direction of an assets movement as versus a specific buy and sell price, traders do not need to concern themselves with an assets purchase basis versus its selling price. In addition, unlike many other types of investments, the gains or losses when trading in binary options are typically always considered to be short-term versus long-term.Prior to placing any binary option trade, the amount of potential gain or loss will already be known to the trader. This, too, is unique to the binary options market. As an example, a trader may decide if the price of gold will be above 1,500 at 2:30 pm. If the trader believes that it will be, then he or she will buy the binary option. However, if the trader believes that it will not be, then he or she will sell the binary option.The price at which the trader buys or sells is not the actual price of the metal, but rather the price is a value that lies between zero and 100. In this case, for example, if the price of gold is greater than 1,500 at 2:30 pm, then it may be priced at 40.00/45.00. (The first number is the bid price the price at which the trader can sell, and the second number is the offer price the price at which the trader may buy).The bid/offer price will typically fluctuate up and down throughout the day. However, the price will always settle at either 100 (if the price of the underlying gold in this example is above 1,500 at the time of the options expiry), or zero (if the price of the underlying gold in this example is below 1,500 at expiry time).Short-term investment assets are those that have been held for one year or less and this is certainly the case with binary options, as some trades have a duration of only 60 seconds. Typically, investors in the United States may deduct up to 3,000 of a short-term investment loss against other income such as their salary or interest from other investments.If the traders loss for the year is in excess of 3,000 then it may carry over into the following year and it will be considered as a long-term loss. In any case, it is best to first consult with a tax advisor in order to determine the exact amount that may be deducted.While no trader enjoys losing money, the reality is that it does happen.
