Binary options are financial market products that are often compared to gambling. This is due to the fact that binary options are characterized as yes-or-no products. The trader decides whether the price of the underlying will be above or below the level at which the option was bought after the expiry of the time.
But the yes-or-no character of binary options does not really have anything to do with price development - this is a property of the product. How the underlying develops depends on completely different factors, such as demand or supply. If you compare the trading of binary options with real gambling, there is a difference.
As is known, the return on gambling is determined by a quota. The difference between binary options and game betting is what this odds depend on. When it comes to game betting, the odds depend on how well the teams have played in the past. As a result, the choice of bets that vote for a favorite team is less profitable because the probability is on the player's side.
Binary options are volatility-dependent
Binary odds Options are determined by volatilities. The classic volatility is the range of fluctuation that the traded underlying reaches in relation to a trading period. Usually and statistically, higher volatility indicates that a certain price level can be reached more quickly. Low volatility indicates the opposite. However, if you shorten the time period, a larger fluctuation range can be regarded as an uncertainty factor.
With classic options, increased volatility indicates that the price of the traded underlying is extremely uncertain. This is due to the fact that options are traded as hedging products. Increased demand for options suggests that market participants are expected to see a larger fluctuation range.
Example of a volatility-based index
An example of how volatility indicates certain market conditions, would be the VIX (volatility index). The VIX indicates the fluctuation intensity of the US leading index S&P 500. The VIX index is calculated using option prices that are always higher when the demand for options is high. If the index rises, this is an indication that the demand for hedging options has increased. Market participants are uncertain in the environment.
However, since you usually hedge against falling prices, the demand for hedging options increases especially when falling prices are expected. The chart shows a clear negative correlation between the VIX and the S&P 500 Future. Every time the VIX started to rise, the S&P 500 index fell a short time later.
Especially in the short to medium-term trading horizon, the VIX therefore represents an indicator of the direction of the S&P 500 index there are also volatility indices on many other instruments, such as the VDAX, the volatility index on the German DAX index.
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Which conclusions can be applied to binary options?
Independent of this That the volatility of an underlying is used by professionals as an indicator, the volatility is also a decisive factor for binary options. Based on volatility indicators, the broker determines the quotes for offered binary options, so to speak, which he can control via terms and predetermined price levels. As a layperson, however, you can no longer look through it and wonder why the terms you want are not being offered. Therefore, the brokers are particularly recommendable, who offer no or few restrictions.
This leads us to the following conclusion: Binary options have the yes-or-no Character, however, one should concentrate fully on the analysis of the underlyings, because that is the factor over which the trader can gain an advantage. The broker has no influence on this, such as the term or the specified price level, which is to be achieved as part of a touch option.
It also becomes clear that the probability within the framework of speed trading, i.e. the Trading 60-second options, almost always on the broker's side. This confirms the assumption that a broad knowledge and experience of the traded underlying must be available before you can act successfully on the markets in the short term.
Especially beginners should therefore concentrate on trading medium-term options. The broker OptionTime has several types of options on offer. There is also a choice of terms.