Binary Options History

Binary options are quickly becoming a favorite of traders as both a hedging and speculation tool. While they seem relatively new, binary options have been traded for well over a decade, though they were originally traded over the counter usually between two institutional investors, mostly hedge funds and investment banking prop desks.

Retail traders had to wait until 2008 before they were granted the right to trade binary options, and since then the popularity of this asset class has gone through the roof. But what exactly are binary options and how do they work? Let’s take a look:

Binary options can best be summed up as a trade that offers only two distinct outcomes, either your trade finishes in the money (winner) or out of the money (loser). This is in stark contrast to traditional vanilla options where concepts such as time decay (theta), volatility, strike price, time to expiration and the like all go into the pricing.

Binary options offer a simple risk-reward proposition, which is known and clearly stated prior to entering the trade. A lot of the trading sites that offer binary options place a return percentage of anywhere between 60% to 90% for winning trades and a 0% to 15% return of capital for losing trades.

Binary options are usually offered on a variety of underlying assets across most trading platforms. Stocks (otherwise known as equities) are offered across most platforms, but usually the number of stocks is limited. Stock binary options are typically only offered on the largest, most liquid names such as Apple, Google, Microsoft, Intel, JP Morgan, and the like.

Technology stocks make up the majority of stock based binary options. Foreign exchange (forex) binary options are also well represented across platforms with most major currency pairs making up the bulk of trading. Popular commodities such as Gold, Silver, Oil, Natural Gas, and Copper and Major Indexes across the globe can also be found on most binary options trading platforms.

One common misconception about binary options revolves around expirations. Most people believe all binary options have a one-hour expiration time; this simply is not true. Over the past few years we’ve seen expirations range anywhere between 15 minutes on the low end all the way up to one month.

While I don’t know many people who trade one-month binary options I’m sure some have found a use for them. One of the major advantages of binary options is the short time frame and simplified payout structure so you are likely to see traders gravitate more to the one-hour binary options.