Now when you are well versed with binary options and have a basic idea and comprehension on how they work, we shall start off with an example to bring you even closer to binary options.
For instance, the asset we are choosing for this example is the EUR/USD balance. The current price of EUR/USD is 1.3000 and we are assuming that within a period of one hour the asset will rise. This means that we are choosing the CALL option and are waiting for the EUR/USD rises within the next hour higher than the current 1.3000. Take a look also at your trading platform. We see that the broker’s payout for this one hour transaction is 79%. We have put the CALL option for this transaction and have risked $100.00 as an investment. For those of you who are used to the forex market, this would be similar to going “long” on EUR/USD.
If our assumption turns out to be correct and the EUR/USD manages to rise above the 1.3000 that we are “in-the-money.” This means that under the current conditions that we have stated we have managed to earn $179.00 on our account. But if the market had gone the other way and if the EUR/USD balance had gone under 1.3000 during the hour which we have waited, we only stand to lose the amount of money which we have invested or $100.00. This would be then called that we are “out-of-the-money”). Generally speaking, the risk when using binary options is limited and you only stand to lose your premium and not a penny higher. You cannot lose more than you stake, which is not the case with the spot forex trading, where the loses get higher as long as the market shifts against you. This is the prime reason why binary options are so popular right now, it limits the amount of the risk and gives you a greater chance of ending up “in-the-money.”
Payouts in Binary Options
Now when you are acquainted with the mechanics of how binary option trades work it is high time to learn more about the payments and how are they calculated.
In most cases, the deciding factor which will affect and determine how much money your capital is or how much you gain will be the amount of the money you decide to trade. Of course, there are other important factors like the type of option trade and the percentage or the broker’s rate.
So in order to explain it better let’s use the example which we offered above once more. The asset which we are betting on is EUR/USD and we have decided to choose the CALL option and invested $100.00. The broker’s rate is 75% and the current balance for EUR/USD is 1.3000. so for the purpose of the example the rate of EUR/USD was higher than 1.3000 after an hour and our CALL option was a winning choice, the calculation will be as so:
$100 (your initial investment) + $75 (75% of your initial capital) = $175
Easy as pie. But let’s not get too overwhelmed because although it looks and sound very easy it still has some deciding factors which you also need to watch for with binary options.
Factors in Payout Calculation
One of the more important factor is choosing your broker. The majority of the brokers offer a rate between 70 % and 75 %. These are the given rates for the most basic option plays given. Some brokers even go as low as offering you a rate of 65 % and the factors which determined the percentage that a certain broker offers are numerous and takes a lot in order to calculate.
Secondary factor is the time that needs to elapse when choosing an asset. The time to expiration for a certain asset can be an enormous component for the equation. In most cases, if the market is relatively less volatile combined with a longer expiration date, it will usually result in an low payout percentage.
Additionally, the brokers “commission” comes as a huge factor in this equation of the payout rate. Brokers are people who are providing a service to you and need to be compensate for their efforts. It is only fair for them to take their commission, but the commission varies constantly among all of them. This is because there are many binary options brokers who provide their services that it is hard to choose the perfect one, but now impossible as well. Because of their large number, rates are becoming more competitive and the chances of finding a great brokers are becoming higher.
When an Option Trade is Closed
Binary options trades are “all-or-nothing” trades, meaning that that is that when the given time period for a certain asset expires. But there are a few deviations from this rule in the form of certain brokers allow changes to be made outside of the fixed time frame. But this options are only available for a certain short period of time or within a closed time frame. For example some brokers would give you an option 5 minutes after the trade has started or 5 minutes before its expiration. But there is a catch for these rules as well, because most of the brokers who allow this changes during the trade to be made offer a lot lower rates than the other ones.
When trading with a broker that allows early closure of an option trade, the value of the option tends to move along with the value of the underlying asset. For example, when choosing the PUT option, meaning the rate going down, the value of the option contract increases as the market moves below the strike price. This would mean that depending on how far it has moved under the strike price, the closing value of the option may be more than the premium, but on the other hand never greater than the agreed maximum payout. Also, if the market would to move higher, the value of the option contract would decrease and the buyer would earn less than the premium paid. In both of these cases, the greatest factor is of course the rate which the broker offers if closed early.
The best tip is not to rush things and study the market thoroughly. Do your research and study your brokers, find out their rates and their conditions which they offer first, and then continue on with making your assumptions.