Wednesday, May 2, 2012

Digital Options Trading - An Introduction To This New Financial Instrument

Digital options, frequently referred to as "binary options" or "fixed return options" are similar to traditional options in many ways but also differ in some very significant ways. They are really quite simple trading instruments requiring no exceptional knowledge of or experience with trading or financial markets. Of course, superior knowledge of markets and trading does often lead to superior results but it is certainly not a prerequisite to being a profitable digital options trader. In this brief article we shall touch on both some advantages and disadvantages to trading digital, or binary options.
Digital options, similar to traditional options, are available on a large number of underlying assets. With stocks, indices, commodities and currencies being the most popular assets available on which to base your binary options trades. However, unlike traditional options these "exotic" options pay out that fixed, known return. And it isn't at all dependent on how far "in-the-money" the option is. If the underlying asset you traded a digital call option on is higher then the strike price by so much as one pip/tick then you are paid out the same high returns as if it finished in the money by 100 points. Magnitude is irrelevant with digital options. Certainly this is one of the appealing features of trading in digital options for investors.
Digital Options Trading Highlights
  • Market Neutral Instruments
  • Quick And Easy To Trade
  • Strictly Limited Risk
  • Small Initial Investment Required
  • Have No Commissions, Fees, Or Other Hidden Costs
  • High, Fixed Potential Returns Known Beforehand
  • Requires Only A Small Move In The Underlying
  • Can Be Traded At Any Time Of Day Or Night
  • Trade On Stocks, Indices, Currencies, Commodities And More
Some Digital Options Trading Disadvantages
  • Potential Returns On Winning Trades Will Always Be Less Then Potential Losses On Losing Trades (You'll need roughly a 55% win rate for profitability)

  • Many Digital/Binary Options Brokers Offer Trades Which Amount To Little More Than A Roulette Spin - 60 Second Options To Name One. (We're fans of binaries but we do recommend our less experienced readers stay clear of these types of trades.)

  • No Claim To An Underlying Asset (a possible disadvantage for some but for the majority not even an issue.)
  • Some Regulatory Conflicts For US Based Traders
Digital options trading can be a great choice for some investors or speculators but as with anything in life it too has both its drawbacks and strengths and isn't right for everyone.

By  Curtis Zwick