What Are Binary Options? Is It Gambling?
Today i will share you an explanation about Binary Options. I have read an e-book by Abe Cofnas in his e-book Trading Binary Options: Strategies and Tactics and i got an explanation about Binary Options who you looking for.
What are binary options?
Binary options are a type of option instrument that provide a fixed deadline for expiration, with a fixed payout. Basically, it is a simple YES or NO (means CALL/ BUY or PUT/ SELL). Specifically, the invest is on whether a settled price of an underlying market will be at, above, or below a target strike barrier, by a defined future time. For example, on a Monday morning, the trader is trying to answer the question: Will the S&P be at 1350 by Friday at 4 P.M.? If the trader anticipated this outcome, and turned out to be right, the payoff using the North American Derivatives Exchange (Nadex) binary options would be $100 per unit. If another index—the S&P 500, for example—did not reach this level, the payoff would be zero dollars. If the trader is correct, the return can approach extraordinary levels of 500 percent and more for only five days of play. This book will show you how it is possible for the average person to achieve extraordinary profits with binary option trading.
Why Binary Options Called Binary?
The binary option is called binary because it fits the condition of being either right or wrong—all or nothing. Binary option trading fits right into the digital era, which is based on binary logic. In fact, the binary options offered by Nadex can be considered to be pan of a type of option classified as European Digital Options.
Why are Binary Options Important?
There are many reasons that come to mind. Binary options are important, but not simply because they are a relatively new trading instrument. In fact, they are not really new They have been used for decades at institutional levels as an over-the-counter instrument but, most significantly, traders in the United States have used them since 2008 when they became approved by the Commodity Futures Trading Commission (CFTC) and regulated through the Nadex. They are often called rebate options because of their use to generate a payment as a form of insurance when damage occurs. But let’s get back to the question. Binary options are important because they offer to the trader, in one instrument, the ability to succeed at many levels that go beyond simply obtaining a winning trade.
Binary options are an ideal trading instrument for new traders to test their skills because at a core level, binary option trading starts with anticipating direction. Being right on direction is one of the most important skills relevant to trading any market. In fact, being wrong on direction accounts for a majority of the losses occurred in any trading. Another key skill important for mastering binary option trading is risk management. A binary option trade is not necessarily a set-and-let decision. This kind of strategy is followed when a position is put on and thereafter the trader watches the screen and sees what happens at the end of the week. Set-and-let trading does not involve managing the trade during its duration. Sometimes this is an effective strategy. However, trading binary options requires a sharp sense of timing. It’s important for the trader to know when conditions are ripe for entry as well as when market conditions have changed enough to justify getting out of the way. Honing entry and exit skills in binary option trading can be transferred to other markets.
Binary options are also important because they offer a level playing field. Anyone can trade the binaries and at very low costs ranging from $5 to $90 per lot at any moment. Because the time frame is at most one week, binary option trading counters the observed tendency of traders to hold losers too long and sell winners too soon (Odean 1998).
But there are even more reasons that contribute to the value of binary option trading. Binary options offer beginning traders the ability to explore over 20 different markets. In a sense, binary option trading presents a discount tour of global markets. Perhaps one of the most important reasons of all is that binary options are regulated (through the Nadex) and offer price transparency. In this post-Madoff era of scrutiny and skepticism, trading binary options that are regulated becomes more and more salient to traders. That is why this book focuses on the regulated binary options offered at the Nadex exchange. For those who want to trade the binary option instruments that are over the counter, the skills built in trading the Nadex instruments will apply.
Binary Options is Not Gambling!
Let’s delve a bit into the psycho-dynamic aspects of binary option trading, because, as you will see later in this book, trading binary options is not only a fundamental and technical analysis endeavor, but it is also concomitantly a psychological behavioral experience. This points to another reason that binary options are exciting: their similarity to gambling. A binary option trade has been often viewed or referred to as a bet. This is metaphorically true, but not in fact correct.
Betting in gambling is quite different from a binary option bet. In gambling, the bettors face the same fixed odds and cannot affect the probability of winning. A bet in a gambling activity is indeed a passive ride. Whether it’s the roll of the dice, or the drawing of a card in a game of poker, the gambler is riding a probability wave. Finally, a gambling bet is associated with a probability about what proportion of time an outcome should occur. A binary option bet is quite different. It cannot be associated with a statistically predictable outcome.
The binary option trade is certainly a ride, but on a sentiment wave. It is also not a passive experience, and it is one that demands attention because the odds of winning are not a function of statistics. Instead, and in direct contradiction to the gambling situation, the odds of winning are determined by the skills of the trader in assessing market conditions and managing risk. In a roll of the dice, the next outcome is independent of the previous roll.
In contrast, in binary trades, the next trade outcome is linked to the market behavior during the previous outcome! In gambling, the prevailing law is the law of large numbers in which, eventually, winning and losing streaks offset each other. In binary option trading, winning and losing streaks are not statistical outcomes.
Binary option trading is a prime example of the value of actionable knowledge. The binary option trader is participating in an imperfect-information game, where it’s never possible to have all the information necessary to win. It clearly takes a certain level of knowledge to play this game well. We will explore what kind of fundamental and technical skills are necessary to develop oneself into a binary option trader in greater detail.
Trading Binary Options: Strategies and Tactics by Abe Cofnas