As the complexity of financial instruments like derivatives, futures and options continue to spiral off into sub genres, we are taking a quick look at one of the newest investment inventions to hit trading – Binary Options.
Binary – or Fixed Return Options are so named for their 1 or 0 – zero sum game nature. You either win or you lose – win and you win big – lose and you lose just as big. Like many derivatives – instead of actually buying an asset itself, investors can speculate on how they think it will perform. When you buy a binary option, you agree a timeframe and a figure with the seller as well as a rate of return if it matures in your favour and a rate of loss if it doesn’t.
So say you pay $100 with a return of 70% on the basis that the phantom stock will be trading higher. If indeed it is, then you get $170 back – and make no mistake – 70% is a huge return for the markets. If however you were wrong – you will equally have agreed a losing outcome – which will be similarly dramatic and could leave you with $15 on your original $100. Both sides know well in advance exactly what the consequences of win or lose would be so there are certainly no surprises lurking in store.
There is absolutely no doubt that we are in the high stakes world of gambling with these new trades. Massive returns versus equally massive loss potential and certainly not one for your grandmother to invest her pension in. But if you are a bit of whizz on the trades, you are looking to branch out your portfolio, you have properly placed hedges to offset any possible losses and you want to try for the big prizes, then binary options trading could be an option!