The rate fluctuates between one and 100 based on the probability of an option finishing in or out of the money. At all times there is full transparency, so a trader can exit with the profit or loss they see on their screen in each moment. They can also enter at any time as the rate fluctuates, thus being able to make trades based on varying risk-to-reward scenarios. The maximum gain and loss is still known if the trader decides to hold until expiry. Since these options trade through an exchange, each trade requires a willing buyer and seller. The exchanges make money from an exchange fee - to match buyers and sellers - and not from a binary options trade loser.Assume your analysis indicates that the SampP 500 is going to rally for the rest of the afternoon, although youre not sure by how much. You decide to buy a (binary) call option on the SampP 500 index. Suppose the index is currently at 1,800, so by buying a call option youre wagering the price at expiry will be above 1,800. Since binary options are available on all sorts of time frames - from minutes to months away - you choose an expiry time (or date) that aligns with your analysis. You choose an option with an 1,800 strike price that expires 30 minutes from now. The option pays you 70 if the SampP 500 is above 1,800 at expiry (30 minutes from now) if the SampP 500 is below 1,800 in 30 minutes, youll lose your investment.Continuing with the example, you invest 100 in the call that expires in 30 minutes. The SampP 500 price at expiry determines whether you make or lose money. The price at expiry may be the last quoted price, or the (bidask)/2. Each broker specifies their own expiry price rules.In this case, assume the last quote on the SampP 500 before expiry was 1,802. Therefore, you make a 70 profit (or 70 of 100) and maintain your original 100 investment. Had the price finished below 1,800, you would lose your 100 investment. If the price had expired exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although each broker may have different rules as it is an over-the-counter (OTC) market. The broker transfers profits and losses into and out of the traders account automatically.The example above is for a typical high-low binary option - the most common type of binary option - outside the U.S. International brokers will typically offer several other types of binaries as well. These include one touch binary options, where the price only needs to touch a specified target level once before expiry for the trader to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before expiry.Binary option innovation has led to options that offer 50 to 500 fixed payouts. This allows traders to potentially make more on a trade than they lose - a better reward:risk ratio - though if an option is offering a 500 payout, it is likely structured in such a way that the probability of winning that payout is quite low.Some foreign brokers allow traders to exit trades before the binary option expires, but most do not. Exiting a trade before expiry typically results in a lower payout (specified by broker) or small loss, but the trader wont lose his or her entire investment.There is an upside to these trading instruments, but it requires some perspective. A major advantage is that the risk and reward are known. It does not matter how much the market moves in favor or against the trader. There are only two outcomes: win a fixed amount or lose a fixed amount. Also, there are generally no fees, such as commissions, with these trading instruments (brokers may vary). The options are simple to use, and there is only one decision to make: Is the underlying asset going up or down There are also no liquidity concerns, because the trader never actually owns the underlying asset, and therefore brokers can offer innumerable strike prices and expiration times/dates, which is attractive to a trader. A final benefit is that a trader can access multiple asset classes in global markets generally anytime a market is open somewhere in the world.The major drawback of high-low binary options is that the reward is always less than the risk. This means a trader must be right a high percentage of the time to cover losses. While payout and risk will fluctuate from broker to broker and instrument to instrument, one thing remains constant: Losing trades will cost the trader more than she/he can make on winning trades. Other types of binary options (not high-low) may provide payouts where the reward is potentially greater than the risk.Another disadvantage is that the OTC markets are unregulated outside the U.S., and there is little oversight in the case of a trade discrepancy. While brokers often use a large external source for their quotes, traders may still find themselves susceptible to unscrupulous practices, even though it is not the norm. Another possible concern is that no underlying asset is owned it is simply a wager on an underlying assets direction.Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices and expiry dates, access to multiple asset classes in global markets and customizable investment amounts. The negatives include non-ownership of any asset, little regulatory oversight and a winning payout that is usually less than the loss on losing trades when trading the typical high-low binary option. Traders who use these instruments need to pay close attention to their individual brokers rules, especially regarding payouts and risks, how expiry prices are calculated and what happens if the option expires directly on the strike price. Binary brokers outside the U.S. are often operating illegally if engaging U.S. residents. Binary options also exist on U.S. exchanges these binaries are typically structured quite differently but have greater transparency and regulatory oversight.Binary options are based on a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade.
