Forex Binary Options

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Forex Binary Options are a simple kind of up or down contract traded on foreign currency cross rates (also known as pairs). While many of the big traders out there make big money trades in the high leverage forex market, average joes usually don’t have the kind of capital needed to stay in the game. The invention of the forex binary options contract has made a nice solution for the many (especially young) traders out there who have good understanding of forex markets and economics but no where near enough capital to make use of that knowledge.

How a Typical Forex Binary Options Contract Works

In a typical forex binary options contract a trader will read the current market price of a forex cross pair and make a decision about the direction of the cross rate for the pair and enter a trade based on whether they believe the cross pair will rise or fall. If the belief is a rise in the cross rate, a call forex binary options contract is bought. If a fall in the rate is expected, then a put contract would be purchased.

You’re probably asking yourself well how much would they pay for the contract? What are the fees? This is where the beauty of forex binary options contracts come in. No fees. No price per share. A simple dollar figure amount of purchase on the forex binary options contract of choice, with a fixed rate of return dependant on whether the option expires in the money or out of the money. It really couldn’t be simpler.

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The Basic Dangers of Normal Forex Trading

Let’s say you were following the EURUSD cross rate today, expecting the EURUSD to fall (indicating a strengthening of the USD against the Euro). In the normal forex market, you might execute a leveraged trade buying $100000 worth of euros with $10000 of capital (10:1 leverage). Do you see a problem with this? Obviously if you don’t have the extra $90000 lying around to cover a strong market move against you (which can happen in seconds) your broker can margin call on your leveraged trade and wipe out your $10K stake in under a second. On the plus side you might gain a few pips, maybe make $1000 if you’re lucky, but more than likely a bunch of HFT trading programs will play with the bid/ask prices until they catch your weak hand and blow up your account. Not fun.

How The Basic Math of a Forex Binary Options Trading Example Mitigates Risk

What if you wanted to have the same upside risk on a forex trade but didn’t want to risk $10000 in capital in a leveraged trade? Could you make the same profit while committing less capital to the trade? Absolutely. It’s simply a matter of buying the right size forex binary options contract on the EURUSD cross rate.

A forex binary options contract typically pays *around* 70% yields on in the money options, so in order to have the profit potential of $1000, one would need to buy a put (or call if the expectation is a rising EURUSD forex cross rate) contract of about $1429. While it is true that an individual binary options trade risks the entire stake committed (in this case $1429 – see binary hedging to see how to mitigate this risk), that’s a far less great amount of capital committed in the forex trade, right?

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See a list of Forex Binary Options by Broker

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