In the wake of the 2008 financial meltdown, investors have looked for safer investment opportunities. Some have turned to the commodities markets, leading to increases in oil, agricultural products, and precious metals. Others have turned towards the foreign exchange markets, hoping to make their fortune from the currency fluctuations between national governments.
Others have opted for binary options, a unique investment opportunity that limits risk for the investor. This limited risk has drawn several investors who were burned by crashing derivatives markets.
What are binary options?
In the simplest terms, a binary option is an all-or-none proposition. An investor makes a wager of a set amount on the value of a certain stock on a certain date. If the stock is at or above the set value, the investor makes the full earnings. If the stock is below the set value, the investor loses only the investment amount.
For example, Bob believes EFG Company will have a stock price of $50 on January 1. Bob takes out a $50 binary option on EFG Company in exchange for a $500 payoff. On January 1, if EFG Company stock is trading at $50 or more, Bob will earn $500. However, if EFG Company stock is less than $50 in value, Bob will lose his $50 investment.
Are binary options safe?
As with any investment, there are risks to binary options. Unlike traditional accounts where the value can plummet, costing far more than the original purchase price, a binary options losses are already calculated at the time of the investment. In the same regard, the return on the investment is also known before hand.
In this arrangement, no matter how high a stock price moves, the holder of the binary option can only gain the agreed upon amount. It is this arrangement that has added a sense of stability to many investors whose portfolios were decimated only a few years ago.
Are binary options regulated?
In the United States, binary options fall under the Securities and Exchange Commission for regulation. They are reviewed under the same rules as other financial products sold and traded. Regulatory authorities in other nations control whether the options are regulated and to what degree.
Do I need a broker?
Binary options can be purchased over-the-counter or from a broker. If you want to buy directly from a seller, you can. Buyers and sellers can get together without any brokers being involved, cutting down on broker fees.
However, brokers will work with you to help you assess your risks related to individual binary options. These brokers may charge a fee for setting up the option, or a cut of the profits. If you choose to go with a broker rather than directly from the seller, be sure to ask what the broker will command as payment.
Can I sell my option before it expires?
That depends on the language in the option when it is setup as well as the market for such an option. Some options may be easier to move than others. Some sellers will not want the option to be sold to another buyer. There are open market exchanges to buy and sell options prior to their expiration, but the terms are dictated by the option.