What you need to know about binary options outside the U.S.

What you need to know about binary options outside the U.S.

Binary options are an easy way to negotiate price fluctuations across multiple global markets, but a trader needs to understand the risks and rewards of these often misunderstood instruments. Binary options are different from traditional options. If they are negotiated, you will find that these options have different payments, commissions and risks, not to mention a completely different liquidity structure and investment process. (For related reading, see: A Guide to negotiating binary options in the US)

Binary options that are negotiated outside the United States also tend to be structured differently than the binaries available in the US markets. When considering speculation or coverage, binary options are an alternative, but only if the trader fully understands the two potential outcomes of these exotic options. In June 2013, the US Securities Commission warned investors about the potential risks of investing in binary options and charged a Cyprus-based company that illegally sold them to U.S. investors.

What are the binary options?

Binary options are classified as exotic options, although binaries are extremely simple to use and understand functionally. The most common binary option is a "high-low" option. Providing access to actions, indices, raw materials, and currencies, a high-low binary option is also called fixed-return option. This is because the option has an expiration date/time and also what is called the exercise price. If a merchant bets correctly on the market address and the price at the time of expiration is on the right side of the exercise price, the merchant is paid a fixed performance regardless of how much the instrument was moved. A merchant who incorrectly bets in the direction of the market loses his investment.

If a merchant believes the market is rising, she/he would buy a call. If the merchant believes the market is falling, he/she would buy a position. For a call to make money, the price must be above the exercise price at the time of expiration. For a position to make money, the price must be below the exercise price at the time of expiration. The price of exercise, the expiration, the disbursement and the risk are revealed at the beginning of the trade. For most high-low binary options outside the United States, the exercise price is the price or current rate of the underlying financial product, such as the S & P 500 index, the EUR/USD currency pair, or a particular stock. Therefore, the merchant is betting whether the future price at expiration will be higher or lower than the current price. (For more information, see what is the binary option history?)

Foreign binary versus US binary options

Binary options outside the U.S. usually have a fixed and risky payment, and are offered by individual brokers, not in an exchange. These brokers make their percentage discrepancy money between what they pay out in winning businesses and collecting from lost businesses. Although there are exceptions, these binary options are destined to stay up to the expiration in a "All or nothing" payment structure. Most foreign binary option brokers are not legally authorized to request U.S. residents for bargaining purposes, unless that broker is registered with a U.S. regulatory body, such as the future SEC or commodities Trade Commission.

Starting at 2008, some exchanges of options such as the Chicago Board Options Exchange (CBOE) began publishing binary options for U.S. residents. The SEC regulates CBOE, which offers investors greater protection compared to over-the-counter markets. Nadex is also an exchange of binary options in the United States, subject to the supervision of the CFTC. These options can be negotiated at any time at a market-force-based rate. The rate ranges between one and 100 depending on the probability that an option ends in or out of the money. At all times there is total transparency, so a merchant can go out with the gain or loss they see on their screen at all times. They can also enter at any time as the rate fluctuates, thus being able to perform transactions based on various risk-reward scenarios. The maximum gain and loss are known even if the merchant decides to maintain until the expiration. Since these options negotiate through an exchange, each trade requires a buyer and a seller willing. Exchanges earn money with a change commission-to match buyers and sellers-and not to a loser from the binary options trade.

Example of high-low binary option

Suppose your analysis indicates that the S & P 500 is going to gather for the rest of the afternoon, although you are not sure how much. You decide to buy a (binary) purchase option in the index S & P 500. Suppose the index is currently at 1,800, so when purchasing a purchase option that is betting the price at expiration will be greater than 1,800. Because binary options are available in all types of time frames-from minutes to months away-you choose an expiration time (or date) that is aligned with your analysis. You choose an option with an exercise price of 1,800 that expires 30 minutes from now. The option pays you 70% if the S & P 500 is above 1,800 at maturity (30 minutes from now); If the S & P 500 is less than 1,800 in 30 minutes, you will lose your investment.

You can invest almost any amount, although this will vary from corridor to broker. There is often a minimum such as $10 and a maximum such as $10,000 (check with the broker for specific investment amounts).

Continuing with the example, you invest $100 in the call that expires in 30 minutes. The price of S & P 500 at expiration determines whether you make or lose money. The price of maturity may be the last quoted price, or the (bid + Ask)/2. Each broker specifies its own expiration price rules.

In this case, suppose that the last quotation in the S & P 500 before the expiration was 1,802. Therefore, you will get a profit of $70 (or 70% of 100 dollars) and keep your original investment of $100. If the price had ended below 1,800, it would lose its investment of $100. If the price had expired exactly on the price of exercise, it is common for the merchant to receive his or her money without profit or loss, although each broker may have different rules, as it is a free market (OTC). The broker transfers benefits and losses automatically and automatically to the merchant's account.

Other types of binary options

The above example is for a typical high-low binary option-the most common type of binary option-outside of the U.S. international corridors usually offer several other types of binaries as well. These include "One Touch" binary options, where the price only has to touch a target level specified once before the expiration for the merchant to earn money. There is a target above and below the current price, so traders can choose which target they believe will be hit before expiration.

A binary option "gamma" allows operators to select a price range that the asset will market until maturity. If the price remains within the selected range, a payment is received. If the price moves out of the specified range, then the investment is lost.

As competition in the binary options space increases, brokers increasingly offer binary options products. While the structure of the product can change, the risk and reward are always known at the beginning of the trade.

Binary options innovation has given rise to options that offer between 50% and 500% fixed payments. This allows traders to potentially do more in a trade than they lose-a better reward: risk ratio-although if an option is offering a payment of 500%, it is likely structured in such a way that the probability of winning that payment is quite low.

Some foreign brokers allow operators to exit operations before the binary option expires, but most do not. Leaving a trade before the expiration usually result in a lower payment (specified by the broker) or a small loss, but the merchant will not lose all its investment.

The rise and the disadvantage

There is a positive side to these negotiating instruments, but it requires some perspective. An important advantage is that you know the risk and reward. No matter how much the market moves in favor or against the merchant. There are only two results: winning a fixed amount or losing a fixed amount. In addition, there are usually no charges, such as commissions, with these negotiating instruments (runners may vary). The options are easy to use and there is only one decision to make: is the underlying asset up or down? There are also no liquidity problems, as the merchant never really owns the underlying asset and, therefore, brokers can offer countless exercise prices and maturity periods, which is attractive to a merchant.

The main drawback of high-low binary options is that the reward is always less than the risk. This means that a merchant must be entitled to a high percentage of the time to cover losses. While the disbursement and the risk fluctuate from agent to broker and instrument to instrument, one thing remains constant: losing trades will cost the shopkeeper more than she can do in winning businesses. Other types of binary options (not high-low) can provide payments where the reward is potentially greater than the risk.

Another disadvantage is that OTC markets are not regulated outside the U.S., and there is little oversight in the case of a trade discrepancy. While runners often use a large external source for their quotes, traders can still find themselves susceptible to unscrupulous practices, although it is not the norm. Another possible concern is that there is no underlying asset; It's just a bet in the direction of an underlying asset.

The baseline

Binary options outside the U.S. are an alternative to speculation or coverage, but come with advantages and disadvantages. Positive aspects include a known risk and reward, without commissions, countless exercise prices and expiration dates, access to multiple classes of assets in global markets, and customizable investment amounts. The negatives include non-ownership of any asset, little regulatory oversight and a winning payout that tends to be less than loss in loss of operations when the typical high-low binary option is negotiated. Traders who use these instruments should pay close attention to the rules of their individual broker, especially with regard to payments and risks, how maturity prices are calculated and what happens if the option expires directly at the exercise price. Binary brokers outside the United States are often operating illegally if they attract U.S. residents. Binary options also exist in US exchanges; These binaries are often structured in a very different way but have greater transparency and regulatory oversight.