Digital Options Trading Basics Explained
Digital Options Trading Basics Explained 5.00 / 5 (100.00%) 1 vote
Binary or digital options have become very popular with option traders from all over the world. This is because digital options only have two possible outcomes; either the trader is right about a prediction or wrong. In either case, the loss or return on investment is fixed. With traditional options, the margin between the strike price and the expiry price matters a lot, so if the margin is slim, the profits or losses will be almost negligible. On the other hand, if the margin is wide, the profits or losses will be substantial. The following are digital options trading basics explained.
Types of Binary Option Trades
Traders can choose between a put and call option, depending on whether they think the market is going to move down or up. In a bullish market, call options are the favorite. On the other hand, put binary options are the most popular in a bearish market. The phrase “in the money” is used to refer to a situation where the price or level of the underlying asset has increased, in case of a call binary option trade, or reduced, in case of a put binary option trade. On the other hand, the term “out of the money” is used to refer to a situation where the price or level of the underlying asset has reduced, in case of a call binary option trade, or increased, in case of a put binary option trade. In the money trades attract a hefty payout while out of the money trades come with a small loss refund.
Types of Assets
There are several classes of underlying assets that traders can speculate on. They include; interest rates, indices, stocks, commodities and forex. Each of these asset classes has dozens of underlying assets that traders can choose to trade. They include; gold, crude oil EUR/USD currency pair, coffee, BMW, Google and Alibaba stocks, S&P 500 and Dow Jones Industrial Average indices among others.
Return on Investment
The returns or profits associated with digital options come in the form of payouts. Every trade that expires in-the-money attracts a payout. This usually ranges from 60-95%. However, this will depend on the number of traders who hold the same position versus those who hold a contrary position. That said, the payouts quoted by a broker for different assets may vary from time to time.
Unsuccessful trades, or trades that expire out-of-the-money, usually attract a loss refund. This refund often ranges from 5-25%, depending on the broker. For instance, if a trader invests $400 in a trade that expires out-of-the-money, the broker will refund $100 to the trader if the loss refund is 25%. Digital options trading basics explained is a guide to help aspiring traders to get binary options trading basics before they venture into real trading. That said, having basic trading knowledge is a necessity before making any investment decision.