There are plenty of investment choices on the market. As time goes on, new alternatives emerge and adventurous investors try them out. When all is said and done, there are usually only a few investment strategies that remain as sound choices. It’s important to do your due diligence and research the different investment strategies that are out there before putting up your money. The worst thing you can do is invest in something you don’t fully understand or know the pros and cons of.
Binary options trading is one of those investment strategies that some people support and others do not. In this article, we explore what binary options are and why binary options cannot be considered as an investment. We also provide some alternatives that you can use to generate good returns over time.
What Are Binary Options?
A binary option is an estimate of the performance of an underlying asset during a given time frame. This term is aptly named because binary options have only two possibilities for you to predict: “call” or “put”. Investors buy “call” options when they think the price of the underlying asset will rise. Investors buy “put” options when they think the price of the underlying asset will fall.
A variety of assets can be traded as binary options including indices, forex, commodities, and stocks. Binary options can also be traded within different time frames. Hourly options are typically used by day traders. Daily options expire at the end of each trading day and are also used by day traders. Weekly options expire at the end of each trading week and are used less by day traders. There are also event-based options that expire after an official news release surrounding an event.
Binary options are capped in terms of gains/losses per trade. The most a binary option can be worth is $100. If you buy a binary option at $20, you’ll either gain $80 or lose $20.
Because of its simplicity, binary options have been considered an attractive investment. Unfortunately, there is more than meets the eye when it comes to binary options. It’s important to consider the disadvantages of trading binary options before considering it as an investment.
Why Binary Options Cannot Be Considered as an Investment
Binary options cannot be considered a good investment for several reasons. When it comes to trading currency as an underlying asset, you can’t predict currency movements during short periods of time. Currency price drops and upticks are somewhat volatile and should only be handled as an investment in the long term.
Since the maximum value of a binary option is $100, the ROI is pretty low. Your reward rate is capped per trade. You’d have to trade lots of binary options on a regular basis to turn a high profit. On the other hand, investing in the stock market directly or forex can give you a much better rate of return over time.
As an instrument, forex is a much more viable alternative for investing than binary options. Trading currencies can be a lucrative investment because currencies need to be exchanged every day in order to do international business. Forex is the largest and most liquid financial market in the world. It’s been proven to be a good place to get real returns on your money if you trade smartly. One thing to avoid is trading in high leverage. This strategy is not advantageous. Although you increase your earning potential when you trade in high leverage, you also increase your potential losses.
Another viable investment alternative is a CFD, or “contract for difference”. A CFD is a tradable instrument between a broker and a client who exchange the difference in the current value of a currency (or other asset) and its value at the end of the contract. CFD’s allow for profits to be realized when the underlying asset moves positively in relation to the position taken. CFD’s are attractive because they have low margin requirements, no day trading rules, and minimal fees. You can compare CFD providers here.
Latest developments
Banc De Binary, one of the largest and supposedly most reputable binary option providers, has decided to shut down recently, after significant pressure coming in from the Israeli security exchange which banned Binary Options in Israel this year, and also working with other regulators overseas to prevent this phenomena from taking place. This very much could be the demise of this entire industry.
Final Thoughts
Binary options may seem simple. But when you look at them closely, you’ll realize that it’s an ill-advised investment, or even a gamble (you have better odds on the roulette table). Whether you’re a long-term or short-term day trader, there are better alternatives. Two other alternatives that can result in some reliable returns are forex and CFD’s. Both of these are tried-and-true investments that offer better ROI than binary options. It’s important to know that with any investment approach, you’ll have to do your research as well as trade smartly.
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