What are binary options and are there alternatives?

Do you want to know what binary options are? In this article, we will extensively discuss how binary options work. I will also introduce alternatives to binary options, as it is prohibited to trade in these investment products in many countries.

What are binary options?

With a binary option, there are two outcomes: yes or no. You either receive the full payout or lose the full amount of your investment. It is not possible to receive the underlying asset when exercising the option.

You can invest in various underlying assets with a binary option:

• Stocks
• Currencies
• Commodities

What are good alternatives to binary options?

You can no longer invest in binary options in Europe. What are possible alternatives for this type of derivative?

CFDs as an alternative

You can choose to invest in CFDs. With CFDs, you can also speculate on price increases and decreases. However, with CFDs, you have more control over your investment. For example, you can determine when to open or close a position yourself.

You can trade a wide range of stocks, commodities, and currency pairs with CFDs. CFDs move along with the underlying asset’s price. When an Apple stock rises, an Apple stock CFD also rises.

Do you want to try trading CFD’s without risk by using a demo? Use the button below and open an account directly:

Options as an alternative

As an alternative to binary options, you can also decide to invest in regular options. With regular options, you can speculate on price increases and decreases. However, with a regular option, you have much more control over your investment. You can apply a strategy, since you can enter and exit whenever you want.

Do you want to try investing in options? Then open an account with a reliable broker & start today:

How to invest in binary options?

Many people see investing in binary options as gambling or as a game. Investing in binary options is then comparable to roulette in a casino. After all, with binary options, you either gain a high profit or nothing at all. Although this method of investing is fun, you will not make a profit in the long term since the payout is generally lower than the initial investment.

Nevertheless, it is also possible to apply a strategy with binary options. You can try to predict the price by means of technical analysis. With technical analysis, you look for certain recurring patterns can be recognized in the price development. It may also be wise to take future news items into account. A positive or negative news item about, for example, a stock can have a significant impact on the price trend.

All in all, due to the short time frame of a binary option, only minimal strategic analysis can be applied. Binary options mostly expire within an hour.

Components of a binary option

• Expiration time: the time at which the option expires
• Starting price: the starting price of the underlying asset
• Payout offer: the amount you receive when the binary option expires

Types of binary options

• High/low binary option: you receive a payout when the price is higher or lower than the starting price at the expiration time.
• One touch binary option: you receive a payout when the price is above or below a certain price at the expiration time.
• Boundary option: you receive a payout when the price is within a certain range at the end of the expiration time.
• Pair options: you choose one stock and receive a payout when this stock performs better than another stock within a certain period.

Example of a high/low binary option

The investor buys a high/low binary option of $100 on the AEX at a rate of $700. If the rate is less than $700 at the end of the term, the investor will receive a return of 82%. If the rate is above $700, the investor loses the entire investment.

• If the price is less than $700 at the end of the term, the investor receives $80.
• If the price is more than $700 at the end of the term, the investor receives $0.

Example of a one touch binary option

The investor buys a one touch binary option of $100 on the AEX at a rate of $700. If the rate reaches above $750 within a week, the investor will receive a return of 90%. If this doesn’t happen, the investor loses the entire investment.

• If the price reaches $750 before the end of the term, the investor receives $90.
• If the price never reaches $750 before the end of the term, the investor loses their investment.

What are the risks of binary options?

• Fraud: not all binary options providers are equally reliable.
• Risk of losing investment: it’s all or nothing with binary options.
• Non-transparent: it’s often difficult to verify whether a contract is being processed correctly.
• Counterparty risk: it’s uncertain whether the counterparty will ultimately pay out.

Why are binary options banned?

The European Union has banned binary options because they are considered too speculative in nature. Binary options operate on the principle of all or nothing. If you make the right decision, you can achieve a large return. If you make the wrong decision, however, you lose your entire investment. The profit you make in case of success is lower than the loss you incur. This means you have to be right more than half the time.

The European Union has decided that this method of investing was too similar to gambling. The short time horizon of a binary option strengthened this feeling. In my opinion, it’s regrettable that the government chooses to ban instead of inform. We have the freedom to drink ourselves to death or gamble our money away in state-run casinos. So why do we ban other products? Is it to make politics look better? Probably yes…

Are binary options an attractive investment?

Personally, I’m not a big fan of binary options. Binary options offer limited opportunities where the payout offer is often well below the investment amount. This means that regardless of your investment strategy, you need to be right more than 50% of the time to make a profit, which is difficult to achieve.