If you want to grow your net worth and produce a stream of income, investing is the way to go. The exact method you choose for investments, though, varies depending on your needs, circumstances, and – most importantly – your level of risk tolerance.
The general rule of thumb is simple: The more money you want to make, the more risk you’ll take on. The less risk you want to accept, the less money you’ll make.
Binary options, one of the newer and more exotic financial instruments out there, is a shining example of this creed. Binary options are high-risk, high-reward instruments that allow you to essentially win a lot or lose everything based on whether you expect an asset to rise or fall in value by a certain date.
If you can navigate those waters and stomach the risk, you can make a good deal of money with binary options. Here, I’ll give you an overview of how that works and how much you can make, especially when compared to other investment vehicles out there.
A Brief Overview of Binary Options
Binary options are called as such because they offer you two and only two possible outcomes: your chosen asset’s price is higher than a certain amount when the option expires and you win a fixed amount of money; or, your asset’s price is lower than a certain amount, which means you lose virtually all of your investment.
For this reason, binary options are also called all-or-nothing options – which is pretty self-explanatory.
The most popular binary options today are coupled with stocks, stock indices, or foreign currency pairs. Most major binary options brokers deal in all of the above asset classes, which is good since they are relatively easy to understand (except for some exotic and uncommon currency pairs).
Let’s take a stock index binary options, say, for the Dow Jones Industrial Average. A typical binary option could offer a 75% payout rate, with a strike price of 13,000 and an expiry of November 30, 2012. This means that you are essentially trying to predict whether or not the Dow Jones will be above the 13,000-point mark when the option expires on November 30th.
How Do I Get Paid?
With all of that out of the way, we’ll now talk about the good part – the money.
You get paid whenever your option finishes “in the money”. This means the asset’s value is where you say it would be when the option expires. That’s important – you don’t get money back if the price goes up (or down) before the expiry occurs but doesn’t stay there. (Well, there is a type of option that allows for those conditions; more on that later.)
If you buy $1,000 worth of Dow Jones binary options, and bet that the Dow will finish above 13,000 on November 30th, then you’ll receive 70% of your investment, or $700. If you guess wrong, and the Dow is at 12,750 or something less than 13,000 on November 30th, you’ll lose your investment altogether.
Of course, some brokers give you 5-10% back if you lose, so you’d receive $50 to $100.
How Do Binary Options Compare?
A 75% return is a remarkable return for any investment – and that is only the rough average. Some payouts go as high as 90%.
As you can imagine, no other popular, mainstream financial instrument or asset generates that high of a return. To get a 75% return with a stock, you have to pretty much get in on the ground floor of a massive price movement upwards that could be weeks in the making. For a bond, you can pretty much forget about seeing that large of a return (unless you get lucky and get a hot junk bond). That big of a return with commodities or foreign currency pairs takes a lot longer to achieve.
In contrast, binary options can give you big returns within a relatively-short amount of time. But – and this is a big but – the downside risk is much greater with binary options. With a stock, you may lose 10% on a really, really bad day of trading. With binary options, you can lose 100% of your investment in virtually no time at all, relatively speaking.
That’s what makes binary options so intriguing and so risky. Many traders won’t touch them. But some do, and have learned how to make good money with their picks.
Plus, there are other types of binary options that are more permissive when it comes to how you get paid. There are one-touch options that pay you off if the asset’s value, at any time prior to expiry, touches a price level either above or below. Let’s say that the price target is 13,200. If the Dow Jones hits 13,200 at any time before expiry, you win – even if it closes below the strike price on November 30th.
Those types can reduce the risk somewhat and make binary options even more attractive when it comes to risk versus reward.
In short, regardless of what type you choose, binary options are risky but can definitely result in impressive returns.