What are binary options:
A Binary Option is a financial instrument based on a simple yes or no question where the payoff is a fixed amount or nothing at all. This means Binary Options offer defined risk and clear outcomes on every trade. Which means, either your stoploss will hit at the expiry of the option contract or your predetermined fixed target will hit. This is why binary options are also known as “All or nothing” options.
How to trade Binary options:
In India trading binary options is illegal. But more on that in the “Legalities Binary Options trading in India” section of this article. The most popular alternative available for Indians to experience Binary Option trading or actually try it out with real money are android apps and a select few websites. The most popular being the “IQ Option”, “OLYMP TRADE” and “ExpertOption”.
I will use an example of IQ Option app for this article.
The most popular binary options contracts available on these apps are forex contracts. The trading process over these apps are more or less the same.
- The first step is to pick the assets you want to trade. Each one is based on an underlying market and your trade is based on that underlying markets price movement.
- Then you want to find a strike price that works for you. The strike is the price level you think the market will be above or below at expiration.
- When opening a trade you will select an expiration day and time. The expiration is the moment of truth traders live for. This is when trading is over and the value of your binary option is determined.
The big buttons you see, “Call” and “Put” are, as their name suggests opens a respective position by clicking on them. The red colored flag that you can see at the bottom of the candlestick chart is the expiry of the contract. The dashed-vertical-white line you see, is the time line. The moment when price crosses the white line, the app would not accept a new order for that particular expiry. The highlighted prices you see on the right axis are the strike prices. You can manually choose from the price or go with the automatically selected closest strike price. The percentage value just above the big green button of Call is the return percentage. Here it is showing 87%. It means, that if you win a trade, and if you had traded with $100, you will get $87 in profits.
Let’s look at the default options trade available here:
Say you entered a trade of a Call option with strike price say 100 and selected the expiry of 15 minutes. Now, only two outcomes are possible. Either you will make 87% profit in your trade (w.r.t previous example) or in losing case, you will lose your entire $100. And this is why these are called “All or nothing” options.
Differences between Traditional/Vanilla Options and Binary options:
- In Binary Options, price movement is irrelevant, just the direction (above or below) while Vanilla Options require a relation of the strike price of an option and the underlying price in order to execute the option.
- In Binary Options payout is fixed ,in Vanilla options payout is Dynamic, based on the underlying asset price.
- Almost all of the Binary Options can’t be exercised before expiry. Vanilla Options usually can be exercised any time prior to expiry.
- Don’t have the right to exercise to stocks while the vanilla options owner has the right to exercise his options and turn them into stocks in case option expires ‘In-the-money’.
- Binary Options in India are not regulated and any kind of cross currency pairs forex trading is illegal and against Foreign Exchange Management Act 1999 (FEMA)
Why Binary Options are better than Vanilla Options:
They are very easy to understand and have a definite risk and reward, the moment you enter into a trade.
Why Vanilla Options are better than Binary Options:
Vanilla Options can be traded right from the moment you entered into a trade and salvage some money if you have got yourself into a losing trade. Whereas in case of Binary Options, you have to wait for the expiry and once a position is opened, you have to wait for either of the outcomes. There is no middle ground.
Vanilla Options can be deployed with variety of strategies and potentially the profits are unlimited! Vanilla Options are regulated in India and the traders have lots of protection against defaulters.
Legalities of Binary Options Trading in India:
Unlike many other countries, binary trading is illegal in India. As per the guidelines provided by the Reserve Bank of India, binary trading or any form of online trading of foreign exchange is not legal in India. The financial sector in India is primarily regulated by the RBI and Securities and Exchange Board of India (SEBI), which do not favour investing in binary options like IQ options in India.
The Foreign Exchange and Management Act (FEMA) prohibits binary trading or forex trading in India through electronic or online trading portals. Any investor who takes up binary trading in India does so at his own risk, with no law to regulate dealings of binary trading options in India.
The first question that comes to mind is, ‘Is IQ option legal in India?’ IQ Option is a binary options trader owned and operated by IQ Option Europe Ltd. It is a regulated and licensed binary options broker, but since the binary option is not legal in India, so IQ option does not hold a legal status here.
With no laws or rules to regulate binary trading in India, investors who are involved in binary options in India do so at their own risk. There is no legal remedy available to a trader who gets involved in an IQ option scam of binary trading in India. There are many fake websites rampant over the internet that scam people and end up stealing their information and money.
Generally speaking there are two schools of thought when it comes to binary options. The first group considers binaries to be an improvement on the standard, rather involved vanilla options; the second group considers binary options to be a form of gambling rather than a form of investment or trading.
It must be conceded that binary options are high risk, high return financial instruments and thus may risk and returns from binary options trading may resemble those associated with betting. However, trading binary options is no different than many other forms of speculating on the financial markets.