Binary Options Trade Duration, Profits and Losses

February 5, 2014 10:07 am

double_up_binary_optionsThe beauty of binary options is the fact that you have a wide plethora of choices. One of these choices is the duration of the option. Since there are many variables in this equation, there are also many alternative.

The duration can range from as little as 60 seconds to as long as a year. You will probably have to check with your broker about the minimum and maximum, but this is what you will usually see. The most common duration traders choose are between 10 and 60 minutes.

However, some brokers would allow you an extension for a premium you can pay. If you think the risk is worth it, you can extend your option with a few minutes and potentially save your investment and make a profit (or you may lose even more, but there is no way to know unless you try, right?).

Just like you can extend, you may also close the trade with some brokers, thus still undergoing a loss, but by taking this early precaution you manage to mitigate some the effects and receive smaller losses.

Trade Duration

To put it into perspective, let’s use an example (note that all values presented in the example are completely arbitrary and don’t represent real prices or returns). Let’s say Google’s stock price is USD 1,150 at 17:00 and you believe it will be lower in 18:00. The payout is 70% so you bet USD 100 and begin the waiting game. However, the stock price commences a slow but seemingly steady rise and it’s USD 1,153 at 17:30, starting to slowly decline. You think that there is no way that it will be below USD 1,150 by 18:00, but there is maybe a chance of that happening at around 18:15. At 17:48 the price is USD 1,151 and continues its gradual diminution. You need an extension so you can maybe save the investment. You ask for the extension (this is called a rollover) and you pay the fee (the fee may vary but it’s usually a percentage of your initial bet, 30% being rather common).

You pay the USD 30 fee (30% of 100 = 30) and you get a 15 minute extension, which is just enough for the stocks to drop to USD 1,149. You win and you collect your profit of USD 170 (your profit is USD 70 but since you had already paid the fee, it’s actually USD 40 for the option; still not that bad). In this scenario you’ve won. However, if the stocks hadn’t dropped you would’ve lost USD 130. Those are the risks you take.

Now let’s take a look at the same scenario from a different perspective. Google’s stocks are once again USD 1,150 at 17:00. Once again you make a prediction, but this time you believe that they will be higher at 18:00 so you bet USD 100 and start waiting. Indeed, the stocks start rising and at 17:30 they are at USD 1,153 so you just smile and wait for the outcome. However, the stocks start dropping and at 17:48 they are USD 1,151 and still dropping. You’re not sure that they will be below USD 1,150 at 18:00 so you need to act fast and salvage what you can before you’ve lost everything.

You ask for a close now (which closes the option immediately). This way you ensure the success of the operation. However, your profit won’t be 70% and instead your profit will be lower (how much lower depends on the broker). Still, you stand to make a profit instead of potentially losing your initial bet. The close now procedure can also assist you reducing your losses in case the market conditions take an unanticipated turn. As we’ve already asserted, the presented scenarios are mere hypothetical examples and hold no practical value; they were utilized in the hopes of explaining the concepts more clearly.

Profits

Unlike normal options, in binary options the profits are fixed and you know what the expected return is at the time of the investment. Of course, there might be certain variations based on the underlying assets, the sort of binary option you’ve chosen, as well as the broker you’ve decided to work with, but you the payout percentage is predetermined and you know what it will be before you make an investment.

Just to give you an example, let’s say it’s 17:00 GMT at the moment and Google’s stocks run for USD 1,150 (as you can see, we are using the same example as before because you’re already familiar with the set terms). The return is once again 70% and you invest USD 100 forecasting that the price will elevate in the immediate future and will be higher at 17:30 GMT. So far so good. At 17:30 the stocks run for USD 1,151, which means that you win and you collect your 70% profit plus your original investment (100+(100×70%)=100+70= USD 170). The important note here is to realize that the payout is fixed, meaning that it doesn’t matter whether the price elevates with USD 1 or USD 10 – the profit you make will be 70% and you know it before you actually invest your money.

This is one of the most essential characteristics of the binary options and what heavily differentiates them from traditional options. In the area of traditional options, the direction is not the only factor of importance; magnitude is also essential. For example, it is quite possible to lose money with a traditional option, if the magnitude isn’t enough to cover your investment, even if you were right about the direction. This is not possible with binary options – if your prognosis is indeed accurate, then you stand to make a profit at the fixed rate you’ve agreed on when you made the investment.

Losses

Sadly, things don’t always turn out as we would wish or even expect. The market is full of surprises and it’s sometimes possible to endure losses thanks to unforeseen market fluctuations in the particular niche you’ve chosen. It happens even to the most prominent and insightful traders. This is one of the risks of binary trading so don’t think that you will get rich quick and easy just because you made a few investments.

As you already know, your profit is a fixed percentage if your investment. It’s predetermined and you know it before you make the said investment. But what about losses? Are they a percentage, too? Sadly, no. The loss you endure is the investment you’ve made. If you’d been wrong in the example above, you would’ve lost USD 100 (because that is how much you endowed). You lose your investment – no more, no less. Just like the profit, the loss is also fixed and you know what it’s going to be before you make the investment (because you can decide how much you want to investment). Whether you lose USD 10 or USD 10,000 depends entirely on how much you invest (if you bet USD 10, then that’s what you will lose, and if you invest USD 10,000… you get the point).

If you lose the entire amount in your account, then you will probably have to fund it again. That is, of course, if you have any money left to fund it with. This brings up a very crucial question: “How much should I invest?” If you’re a beginner, we would recommend investing very small amounts (there are brokers who would even let use a “demo” where you don’t win or lose anything; however, beware of scammers!). We will talk more about investments and money management in subsequent sections. All you really need to know about it right now is that it’s very important and it’s what separates the winners from the losers.

Where to Trade

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