|Image Courtesy: findunifi.com|
Binary considerations to be‘exotic options’, but binaries are easily understand and are extremely simple to use. The most common binary option is a "high-low" option. A trader who chooses this type of trade selects an asset from a host of commodities, currencies, stocks or indices, decides on a specific time period, as short as 15 minutes, and predicts which direction the price of his asset will go-up or down. This is referred to as his strike price.
If the trader has called correctly, and the price went in the direction chosen within the right time frame, he will receive a return which was fixed before he placed his trade, usually between 70-80% of his investment regardless of how much the instrument moved. A trader who has wagered incorrectly on the market's direction suffers a loss on her/his investment.
Binary options are used as an alternative for speculating or hedging. Advantages of binaries include an identified risk and reward ratio, no commissions, choice of strike prices and expiry dates, access to multiple asset classes in global markets and flexible investment amounts. Disadvantages include non-ownership of the asset, little or no regulatory oversight and a profit payout that is normally lower than the loss on losing trades.
Binaries in the United States
Binary options traded in the U.S. are structured differently than European binaries and without regulation, the U.S. Securities and Exchange Commission sees greater potential risks to the trader. Till 2008, most foreign binary options brokers were not legally allowed to solicit trading from U.S. residents unless that broker was registered with a U.S. regulatory body such as the SEC or Commodities Futures Trading Commission. In 2008, the SEC began to regulate certain exchanges such as the Chicago Board Options Exchange (CBOE) which began listing binary options for U.S. residents while the Nadex binary options exchange in the U.S. became subject to oversight by the CFTC.
There is still quite a bit of misunderstanding regarding the legality of binary options trading in the U.S. Much of it is a stems from the increase in off-shore binary options platforms and the off-exchange or OTC contracts they offer. Off-shore platforms are still prohibited from soliciting binaries to retail customers in the United States. And only recently, in 2013the CFTC charged a Cyprus-based company with selling them illegally to U.S. investors.