The Costs of Trading Binary Options

When it comes to any sort of trading, it’s important to understand that there are costs involved. Often, these costs come in the form of the price you pay for something, as well as the possible loss you incur if you choose wrong. With binary options, the cost of purchase and the risk of loss are the same thing.

Buying Binary Options Contracts

Like other options, binary options are based on an underlying asset, such as a commodity or a currency. However, binary options are often less complex than trading “regular” options because the outcome is either-or. In most binary options trading, you buy a contract based on whether you think an asset will close at or above a certain strike price, or whether it will close at or below that strike price.

If you are right, you receive a payout. If you are wrong, you receive nothing. The cost for binary options is paid almost entirely up front. You pay when you buy the contract. If you are right about where the asset will close, then your profit is your payout minus what you paid for the contract. If you lose, than your cost is what you paid for the contract. One of the advantages to binary options trading is that you know, up front, exactly what the risk is, and you pay your costs at the outset.

Prices for binary contracts are usually based on the likelihood of a certain outcome. Prices for contracts are often quoted at between $0 and $1. You pay for each contract at once. So, if you buy 50 contracts at $1 each, you spend $50. If you are wrong about the outcome, you lose the $50. If you are right, though, you profit. You might receive $2 a contract if you are right, with a profit of $50.

Different brokers have different rules on expiry. Some brokers offer you the chance to keep some of your money. Indeed, you might only lose 90% or 80% of your investment when your options out of the money, depending on the broker’s expiry rules. Other brokers might let you have your money back if the price expires exactly on the strike price, providing no profit and no loss.

The risk is all accounted for up front, so if you lose, that is your only cost. This is in contrast to other types of trading, including some other types of options trading, in which your costs can mount as time passes. With binary options trading, there is an expiration date set ahead of time, and your cost is fixed, based on how many contracts you buy, and the perceived probability of the outcome.

Non-Monetary Costs of Trading Binary Options

You should realize, though, that there are non-monetary costs associated with trading binary options. In order to be successful, you need to put in some time and effort. While binary options trading is simple in theory (and in practice), success requires that you do some preliminary research. It’s a good idea to understand what affects the underlying asset, so that you have a better idea of whether it will close above or below the strike price.

It’s also important to understand your emotional risk tolerance, as well as your financial risk tolerance. Know how much risk you can stomach, as well as what your finances can handle. If you buy binary options contracts, and you are wrong, can you afford to lose the money? And what affect will that have on your emotional state? Consider these costs as well. It’s important that you understand your situation, and consider the non-monetary costs as well. Realize what you could lose, and never risk money that you can’t afford to part with.