Binary options are a very attractive and highly rewarding trading option for a Forex Trader. It gives an investor or Forex trader an alternative way to invest and trade the foreign currency pairs in the Forex market. however, they also come with a different set of pros and cons. Binary options is a very effective way to trade the foreign currency pairs not only for shorter time duration but also for getting weekly exposure in the pair by keeping the risk minimized only with the amount paid for buying the option or till 100$ per lot. It makes it a easy way to get the exposure and keeping the risk at a controlled ground, although binary options are comparatively expensive then Forex trading with a broker who provide massive leveraged on the deposited amount to the investor for trading purpose in spot Forex trading but still the ability to keep the maximum loss in control and give a comparative higher profit potential attracts may traders towards Binary option Forex trading.
What Is Binary Options
Binary options work almost the same as derivative instruments which have no value in it the value of the option is derived from the underlying security. In binary option, you can buy and also sell the binary option according to the expected movement in the underlying asset. As it gives you the chance to speculate on the possibility of a future outcome and if you have asserted the situation and the anticipated the price of the underlying asset correctly then you can make profits out of the markets.
Majorly binary options can have two possible outcomes as the settlement of the binary option happens on a predetermined value of either $100 or $0 as the value of the settlement is calculated by the valuation of the current market price of the underlying asset with the strike price of that binary option that whether it is trading above or below the expected strike price of the binary option and whether it is according to the expectation or forecast or against the decision.
Binary options are widely used to speculate on the price movement of different underlying assets like Indices, Currency pairs and stocks as well. In the times of major economic events traders usually choose to trade in binary option in order to encase the opportunity of increased volatility at the outcomes of various economic events and reports like jobless claims inflation figures and interest rate decisions as these news and economic reports have the power to move the market quickly and with the help of binary option one can keep the loss in control and can earn a massive amount of money by utilizing the volatility created by these events.
For example, If a trader is expecting the price of the pair EUR/USD to reach the level of 1.1800 from the current level of 1.1700 and he is confident that it will be trading above or at the level of 1.1800 later that day. then the trader can buy a binary option on EUR/USD trading at or above 1.1800 by that day’s close, and if this binary option on EUR/USD pair is trading at $48 (bid)/$50 (offer). Then the trader can buy the option at $50 in order to make money out of the market as If the price of EUR/USD closes at or above 1.1800 levels as per the expectation then the trader can earn a payout of $100, which means that the gross gain of the trader will be $50 or 100%. On the other hand, if the price of EUR/USD pair falls below the level of 1.1800 by the end of the day, then the trader will lose his invested $50 for a 100% loss in this trade.
Binary Options in Forex Markets
Binary options in the Forex market is available from many exchanges such as NADEX, a trader can trade on major currency pairs in binary options through various exchanges which offer an option to trade on popular currency pairs such as USD/CAD, EUR/USD, GBP/USD, USD/JPY, as well as on other cross currency. A trader can choose different expiry for the binary option with ranges to intraday and goes to weekly expiry as well.
The expiry of intraday Forex binary options is hourly in majority of exchanges, where the daily options expire at certain set times throughout the day and the weekly binary options expire at 3 P.M. on Friday in the majority of exchanges. The expiration value is usually calculated by taking the midpoint of last 25 trades in the concerned currency pair after reducing the highest and lowest five prices to give a fair calculation of average price to give a closing.
The Bottom Line
Binary options is a widely used and popular option to trade in the Forex currency pair as binary options provide the most important factor to keep the risk under control by capping the risk to the premium paid only which give a huge advantage in the Forex trading to the trader.
However, binary options also come with few disadvantages along with advantages just like any other investment option. But the biggest advantage of binary option with makes it very useful in a volatile market is the ability to limit the losses even in times of sudden and big movement in the market which makes it a very useful tool to trade The Forex market.