A binary option is a position that one can take which will yield one of two predetermined outcomes. The investor decides whether the outcome will close at a positive result or a negative result. If the investor picks correctly, they will receive their investment back along with a predetermined profit amount. If the investor picks incorrectly, they will lose their investment.

With this type of investment the amount that the stock, commodity or item change in value does not matter from the perspective of the investor. The only thing the investor is concerned with is if the value has increased or decreased and if that result matches with the position that they chose to take on it.

For further clarification, we have described several examples to help you better understand how a binary option really works.

Example A: Investor Robert decides that the value of corn will increase so he takes a binary option position designating this. The value of corn increases from $90 to $91.

Result: Robert makes money off of his investment because the price of corn has increased from $90 to $91.

Example B: Investor Robert decides that the value of corn will increase so he takes a binary option position designating this. The value of corn increases from $90 to $96.

Result: Robert makes money off of his investment because the price of corn has increased from $90 to $96. The amount that Robert makes off of this investment is equal to the amount that he made in example A, even though the increase is more substantial here.

Example C: Investor Robert decides that the value of corn will increase so he takes a binary option position designating this. The value of corn decreases from $90 to $87.

Result: Robert loses the money that he used to make the investment in this example. He did not predict the correct way in which the value of corn will change. Therefore, he does not receive any money back from his investment.

Example D: Investor Robert decides that the value of corn will decrease so he takes a binary option position designating this. The value of corn decreases from $90 to $88.

Result: Robert makes money off of this investment because he correctly predicted the direction that the price of corn went. It does not matter that the price of the corn decreased. What matters is if is agrees with the side that he took on the binary option.

Shorting a Binary Option

As you see in example D, it is possible to make a profit even if the value of the stock, commodity or item decreases. The important factor is that the prediction is correct. The amount that the value changes and the direction it moves are irrelevant for the purposes of the binary options trade.

Am I buying the stock, commodity or item?

Unlike buying a stock where you are buying a small fraction of a company, you are not buying a part of the item when you take a binary position. Instead of investing in the company, you are investing in the outcome of the value of the item. For this reason, the investor’s actions on the binary option have no impact on the company or item itself.

Why you should Trade Binary Options

Binary options provide a simple and straightforward way to profit off of value changes that occur on a daily basis. Since a lot of the variables that exist with traditional investing are removed with binary trading, it requires a lower learning curve to become successful in as compared to other types of markets. Binary option trading is a great way for beginners to learn how to make money with their investments.