Binary option trading varies from broker to broker but the basic concept is the same: each trade has only one of two possible outcomes. Binary option trading calls and puts turn over extremely quickly - either hourly or daily. Fortunate day traders find their investments landing consistently in the money - and reaping huge rewards as a result.
High Yields Attract Investors to Binary Option Trading
Yields on the rapid turning trades range from sixty percent to in some cases seventy five percent. It is literally impossible to compute the compounding rates of return on some of these investments because the yields are so high. Here's an example of how a trade payout might look.
Let's presume first that the trade expires in the money. What would a two hundred dollar investment in seventy five percent yielding call options payout? The answer is a $200 trade in a contract pays $350 ($200 capital investment plus 75% profit of $150).
What would happen though if the position expired out of the money? This is where brokers can vary significantly. Sometimes an investor can unload an out of the money put or call prior to expiration - but some brokers operate differently. An unsuccessful trade might pay $30 (15% of the original $200 investment at expiration) on some particular securities. In other cases a trader might not be able to move his or her position at all. The bottom line is that it is difficult to get out of an out of the money trade.
A Binary Options Strategy
One possible way to reduce the possibility of getting wiped out while using all or nothing binary option trading contracts is by pairing up an in the money call (for example) with an at the money put.