Digital options are quickly gaining traction in the world of investing. As an investor, your goal when entering the digital options market is to make profits. To achieve this, you need to take the time to familiarize yourself with how this emerging market works. A trader that does not take their time to understand this market may end up losing more capital than they gain. To set yourself up for success, read up to write and learn what digital options are and how they work.
What are digital options?
A digital option also referred to as binary option or all-or-nothing option, is a type of trading, an option that offers investors a chance of a fixed payout if the underlying asset’s market price exceeds a predetermined limit, known as the strike price’. This way, traders get to benefit from giving correct predictions on the future price of an asset. These options are based on a statement with two possible outcomes which are; YES or NO.
This enables investors to speculate on the probability of an event occurring before a position expires. Note that although digital options yield profits, they are not exercised in the same way as vanilla options which offer the potential possession of the underlying asset.
Requirements to trade digital options
There are certain requires set in place for any trader who wishes to trade digital options. To trade digital options, you need to start by finding a reputable and experienced broker to work with. A broker will provide you with a trading platform where you can open a trading account to trade digital options.
Once you get a trading platform, you will be able to trade multiple financial securities. However, you can only trade within the boundaries set by the broker you are working with. Although most binary options require a hefty chunk of money to invest, digital options do not. You can start investing with as little as one dollar. This way you can start trading the market and make very small loses as you try and find your way around.
Types of binary options
There are 4 types of digital options;
High/low: this is the most popular option of all digital options. This option is predicted based on the underlying assets based on predetermined prices. Investors take position during the expiration period.
Touch: These options also demand positions be made at the time of expiration.
Range: For the range option, the asset is already in a predetermined range during the time of expiration.
60 seconds: Finally, this option expired within 60 seconds of purchasing.
What can you trade when entering the digital options market?
Unlike other investment options, digital options provide a range of trading options. In this market, investors can trade stocks, currency pairs, commodities, and indices. This extensive list of assets provide traders with a lot of options.
If you have experience trading stocks, we highly recommend sticking to what you are already good at. Also, investors who want to play around with multiple types of investments can also do the same within the same online platform. Generally, trading digital options allow all kinds of investors to profit.
Breaking down the digital option
Digital options may appear simple to many traders and can be traded on poorly regulated or unregulated platforms. Hence, they tend to carry a high risk of fraudulent activity. To prevent yourself from falling victim to these scams, we highly recommend that you use platforms that are regulated by the Commodity Futures Trading Commission, the Securities and Exchange Commission, and other reputable regulators.
How do digital options work
Digital options work by giving traders two possible outcomes of any given trade. If your prediction is correct, you automatically generate a profit. If on the other hand, it is incorrect, you lose your initial output.
Before opening a position, a trader needs to decide whether their chosen market’s price is bound to rise or go down. If you think that the market price will go up, you will need to buy a digital option Called a CALL. If you think the price will plummet, you need to buy a digital option known as a PUT. CALL digital options yield a profit if the underlying asset’s market price goes above the strike price once the option expires. PUT digital options return a profit if the underlying market’s price is less than the strike when the position expires.
The rules of digital options are that the price of the asset must be more or less than the preset price at a specified time and date. Also, the value of the potential profit or loss is determined at the beginning of the contract and is not dependent on the magnitude by which the price of the main asset moves. If a trader believes that the price of the asset they are trading will be more than the strike, they can buy the CALL option. If on the other hand, they think that it will be less than the strike, they can sell the option which is equivalent to buying a PUT.
How to trade digital options
- Here are the key steps an investor should follow to make a deal
- Choose the desired asset including currency, commodities or blah
- Choose a preferred expiration period
- Select the amount of money you want to invest
- Choose a strike price
- If you believe the price will rise, click on CALL and if in your opinion the price will go down, click on PUT.
- Wait for expiration time to strike of selling the option prematurely.
Although there are three key parameters to choose from when looking to enter a position; there are many strategic options to choose from. Based on various factors, a trader may decide to choose a strike price that is far from the incumbent price with the hopes that the price will meet the desired level.
Digital options provide investors with many profitable opportunities. To benefit from digital options, take the time to first understand how it works, obtain the requirements need to start and you are good to go.