Digital or binary options offer a way for individuals in Canada to trade in many global markets based in fluctuations in prices. However, as a trader of binary options a person needs to understand that there are risks and rewards involved. A binary option is different than a traditional option. Binary options offer different payouts, risks, and fees. Additionally, there is a different investment process and liquidity structure when dealing with binary options. When a trader is considering hedging or speculating, binary options offer an alternative, but only if the person trading fully understands the possible outcomes.
Binary Options: What are they?
A binary option is classified as an exotic option. However, binaries are very easy to use and understand in the term of functionality. Binary options can also be termed a fixed-return option as they provide access to indexes, stocks, foreign exchange, and commodities. Binary options offer a expiry date/time, which is called the strike price. If a person correctly chooses the direction of the stock market as well as the price when the time expires, the person will be paid a fixed return on their wager, no matter how far the instrument moved. Additionally, a person who makes an incorrect wager will lose a fixed amount of their investment or all of their investment.
If a person thinks that the market is going to go up, he purchases what is termed a “call.” If a person believes that the market is going to go down, a “put” is purchased. In order to make money on a call the price of the instrument must be higher than the strike price at the time of expiration. When the trade is made, the information about the strike price, payout, expiry, and risk factors will be provided. The payout of a binary option and the risk of the binary option may vary by a large degree as the market moves. For example, if a call is made and the call is “in the money” or above the strike price by a large amount, there is a great chance that the wager will make money if there is a short amount of time left before the expiry time. However, the pay out rate and the risk were determined and locked in at the time the trade was made, which means that different trader may earn different amounts based on when they entered their trade.
Trading binary options in Canada offers an alternative to Canadian traders who are thinking about hedging. However, there are advantages and disadvantages to this type of trading. The positives of binary trading include no commissions, countless strike prices and expiration dates, access to global markets, and a known risk and reward. The negatives of binary trading in Canada include that there is no ownership of an asset, there are very few laws governing this type of trading, and the payout is always less than what a loss would be on a losing trade.