Binary options represent the latest twist on option trading. There are only two outcomes when trading binary options. The underlying security will either be above the binary option price or below it before the option expires. You don’t need to open a margin account or hold reserve funds in your account. You can trade binary options on stocks, commodities, currencies and indexes.
Go online and research binary options brokerage firms. Be sure to use the phrase “binary options” in your search criteria. Compare trading platforms and fees, and make sure the firm accepts U.S. citizens as clients. When you apply for an account, request a demo account be opened at the same time. You can fund your account using your credit or debit card.
Learn how binary options work. It is your task to research the security and decide if the price will rise or fall before the option expires. If you believe the security’s price will go up, buy a call. If you are convinced it will fall, buy a put. Your trade only has to be 1 cent above or below the closing price for you to win. Payouts can be as high as 90 percent, so if you bought a call option for $100, your payout would be $100 multiplied by 90 percent, which would be $90. If you were incorrect, you could lose the entire $100.
Determine how you will exit your trade. You can immediately close your trade if the option is not performing as you expected. For example, if you buy a call option expecting the share price of a stock to go up and five minutes before the option expires the price hasn’t moved enough, close the trade before it expires to lock in a profit or keep your loss small. You can also roll over a nonperforming option. For an additional fee, most firms will allow you to extend the option’s expiration period to give it more time to move in your anticipated direction.
Go to your order entry page and type in the symbol of the security you want to trade. Look at the current price and -- based on your research -- select a binary option with a price higher or lower than the security’s price. Enter the number of binary options you want to trade and place your trade. Use the charting feature to help monitor the trade. Let the option expire if you have a profit or close the trade to contain a loss. You can also roll the trade over if you need more time.
- You can trade binary options using different option strategies.
- Start by trading one or two options at a time to help preserve your capital.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.