If there is a point where the gambling and forex worlds intersect, this would definitely be binary options.
In their essence, binary options are nothing but bets on currency or stock price movement direction: when trading binary options, traders are basically predicting whether the price would go up or down - as simple as that.
If the prediction is correct, trader get paid certain amount of money, known as payout or return. The average return for EUR/USD, for example, ranges between 75% and 85% of the bet, depending on the broker. Here is an example: if you bet $100 and you win, you get paid $185 (your $100 + return of $85)
There a few different types of binary options offered on the market. The most popular type is most often called High/Low or Put/Call. With these options, traders need to bet on whether the price of a certain instrument would go upwards of downwards within a pre-determined time frame. Once that time frame is over, the option is deemed expired and the bet is settled.
Another popular option type is One Touch. With these options, there is a pre-defined price level, and the price must touch that level for the trader to win. Again, a certain time frame is set for the expiration of the option; if the price of the asset reaches the pre-defined level, the bet is closed immediately and the traders collect their winnings. If the level is not reached at expiry, the bet is lost. These binary options are generally harder to win, therefore the return percentage for them is significantly higher - usually about 500%.
60 Second binary options are regular High/Low options with expiry period of 60 seconds. Many traders tend to like these options because they can get you a quick payday if you manage to notice a short-term market trend.
One thing that is still a grey area when it comes to trading binary options is regulation. As I mentioned, this is a mix between trading and gambling, therefore in many countries binary options providers are not obliged to register with regulators. Some binary brokers choose to register with gambling authorities; others – with financial regulators; and then there’s the ones that don’t report to anyone.
The good news is that the increasing popularity of binary options trading has put it in the spotlight and binary option legislation implementation is already being considered. The Cyprus Securities and Exchange Commission (CySEC) was the first regulator that proclaimed binary options to be an investment instrument and added it to the scope of services it oversees. The Financial Services Authority in Japan is the next regulatory body taking steps in that direction.