Functioning binary options 2020 - explanation for beginners

How binary options work (01/20): What is a "call option" & how do profits come about? For the great guide, trade binary options now.

The trading of financial market products, whether binary options or CFDs, often appears to the layperson as an impenetrable segment. This is because many private traders have little to do with the matter before they start trading. The functionality and the process in the background of a trade are therefore often hidden from many traders. But how does binary options trading actually work - and what happens when you buy a call option?

These are questions that traders often ask themselves, but in many cases a good explanation is not given.

Basic questions about binary options trading

First of all, it is important to answer some basic questions:

  1. How do binary options work?
  2. Is there a stock exchange for binary options?
  3. How does the lever come about?

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Functioning binary options 2020 - explanation for beginners

to question no. 1: How do binary options work?

To answer the first question, one should first know the basic property of options. This is characterized by an asymmetrical distribution of returns, which means that the loss potential is limited, while the profit potential is infinite. However, this only applies in part to binary options, because both the loss and the profit potential of binary options are limited. Also, the early sale of the binary option is usually only possible under certain conditions. So much for the structure.

Since the trader must therefore expire a binary option, he then also loses his stake. However, this is higher than the previously agreed return for binary options. The difference between the agreed return and the investment amount per trade is the broker's earnings. In any case, he receives this. Example:

  • Price for call option: 75 euros
  • Agreed return: 75% = 56.25 euros
  • Difference: 75-56.25 = 18, 75 euros

The broker initially earns 18.75 euros from the transaction - regardless of whether the trade is going well for the trader or not.

How can you spend a minute?

Zur Question No. 2: Is there a stock exchange for binary options?

The question can be answered with a clear "No". There is no binary options exchange and this applies to most derivatives. The only exchange-traded derivatives that are tradable for private customers are futures and classic options.

All other derivatives are traded "over the counter", which means that an issuer has to enter the market. In this case one speaks of "market making". Forex trading is also not an exchange-traded product, but takes place on the interbank market.

So what's the difference between exchange-traded products and market-making products? This can be answered by imagining the main function of a stock exchange. An exchange must provide the market. So it brings market participants together, which basically a broker does when he puts the market in place.

The only difference is that market participants are only brought together on the exchange if they are available. Anyone who has already traded shares will remember that you don't get the price you want for every value.

However, in a market situation, it can happen that the liquidity is so low that the market maker takes the counter position of the trader as long as another market participant has been found. The trader therefore trades against the broker during this period. This does not necessarily have to be the case, because the broker can hedge against the loss in the event of a successful trade for the trader by buying classic options.

Usually he will do so, and in The costs for this protection should also be included in the 18.75 euros. But it is also a fact that he, as a non-standardized market maker, is not obliged to do this. In the hope of achieving speculative profits, he can also choose to trade against the dealer.

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Functioning binary options 2020 - explanation for beginners

On question no. 3: Where from is the lever coming?

Double-digit returns are not uncommon for derivatives. This is because derivatives are only transactions in future events. The price for derivatives is therefore lower than the price for the actual base object such as the stock index or the commodity.

Market Makers have the advantage that they have a pool of investors. With the capital you can either buy real assets or buy derivatives as a hedge. They also have access to the interbank market, which means that they receive financing for buying and selling and can therefore pass on the prices for derivatives at a correspondingly low price to customers.

Trading in binary options - an example

A short example should serve as a first aid in how the trade works. The considered trader is convinced that the Dax will lose value in the next 30 minutes. As a result, he concludes a put option with his broker that looks like this:

  • Underlying: Dax
  • Type: Put Option
  • Bet: 100 euros
  • Agreed rate of return: 80 percent
  • Loss limitation: None
  • Current DAX rate: 10,000 points

In this example, there are now basically two scenarios possible:

  1. The Dax actually increases by a few percentage points due to positive news from the automotive industry. As a result, the trader's option is in the money and receives his return of 80 euros within 30 minutes.
  2. The Dax could also fall, for example, because the reports are less positive than analysts actually anticipated. Then the entire capital is gone and the trader loses 100 euros.

As transparent as trading is, it is also speculative. It is therefore important for traders to acquire specialist knowledge about trading and to trade with absolute focus. This is the only way to successfully trade binary options in the long term.

Functioning binary options 2020 - explanation for beginners

Learn to trade binary options - traders can only gain experience in the IQ option demo account

if they actively trade, In live accounts, however, this is always associated with a risk of loss, which beginners just want to avoid. IQ Option was one of the few brokers to respond to this and offers a free, non-binding demo account. This has the following features:

  • Unlimited term
  • Starting capital of $ 1,000
  • No opening of a live account required
  • No deposit required
  • Realistic trading environment
  • Numerous underlyings available

This account is perfect for traders to get started in trading. This is mainly due to the unlimited term of the account. Traders can trade in virtual capital for several weeks or months without the broker asking for a regular account to be opened. All trading takes place under real conditions, full real-time prices are offered. Another positive aspect is the uncomplicated opening of the IQ Option demo account:

  1. First, the broker's homepage is called up, on which you can find a registration form.
  2. The form must be completed, whereby no personal data is requested. Traders only need to provide a valid email address, fictitious username and password. All data is transmitted to the broker with a click of the mouse.
  3. Then only the email address needs to be verified via a confirmation link. After that, the IQ Option demo account can be used fully and in full.

Conclusion

Binary options are speculative products. Derivatives for hedging and hedging were invented, but today they are predominantly speculative products. This also includes CFDs. Since the nature of these products is speculative, it is advisable to either start with a small amount or to try out a few trades using a demo account.

Now to the exclusive demo account of IQ Option

Functioning binary options 2020 - explanation for beginners

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