What is flat and what relation does it have to binary options

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Contents

A Guide to Trading Binary Options in the U.S.

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

U.S. Binary Options Explained

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.

Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

A Zero-Sum Game

Eventually, every option settles at $100 or $0—$100 if the binary option proposition is true and $0 if it turns out to be false. Thus, each binary option has a total value potential of $100, and it is a zero-sum game—what you make, someone else loses, and what you lose, someone else makes.

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Each trader must put up the capital for their side of the trade. In the examples above, you purchased an option at $44.50, and someone sold you that option. Your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. The person who sold to you has a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.

A trader may purchase multiple contracts if desired. Here’s another example:

  • NASDAQ US Tech 100 index > $3,784 (11 a.m.).

The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 at that time, you sell at $74.00, or place an offer above that price and hope someone buys it from you.

You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.

Figure 1 shows a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order, called a ticket.

Nadex Trade Ticket with Max Profit and Max Loss (Figure 1)

Trading Forex with Binary Options

Binary options are an alternative way to play the foreign currency (forex) market for traders. Although they are a relatively expensive way to trade forex compared with the leveraged spot forex trading offered by a growing number of brokers, the fact that the maximum potential loss is capped and known in advance is a major advantage of binary options.

Defining Binary Options

Binary options have two outcomes: They settle either at a pre-determined value (generally $100) or at $0. This settlement value depends on whether the price of the asset underlying the binary option is trading above or below the strike price by expiration.

Binary options can be used to speculate on the outcomes of various situations: Will the S&P 500 rise above a certain level by tomorrow or next week? Will this week’s jobless claims be higher than the market expects? Or will the euro or yen decline against the U.S. dollar today?

For example, say gold is trading at $1,195 per troy ounce currently and you are confident that it will be trading above $1,200 later that day. Assume you can buy a binary option on gold trading at or above $1,200 by that day’s close, and this option is trading at $57 (bid)/$60 (offer). You buy the option at $60. If gold closes at or above $1,200, as you had expected, your payout will be $100, which means that your gross gain (before commissions) is $40 or 66.7%. On the other hand, if gold closes below $1,200, you would lose your $60 investment, for a 100% loss.

Binary Option Buyers and Sellers

For the buyer of a binary option, the cost is the price at which the option is trading. For the seller of a binary option, the cost is the difference between 100 and the option price and 100.

From the buyer’s perspective, the price of a binary option can be regarded as the probability that the trade will be successful. Therefore, the higher the binary option price, the greater the perceived probability of the asset price rising above the strike. From the seller’s perspective, the probability is 100 minus the option price.

All binary option contracts are fully collateralized, which means that both sides of a specific contract – the buyer and seller – have to put up capital for their side of the trade. So if a contract is trading at 35, the buyer pays $35, and the seller pays $65 ($100 – $35). This is the maximum risk of the buyer and seller and equals $100 in all cases.

Thus the risk-reward profile for the buyer and seller in this instance can be stated as follows:

Buyer

  • Maximum risk = $35
  • Maximum reward = $65 ($100 – $35)

Seller

  • Maximum risk = $65
  • Maximum reward = $35 ($100 – $65)

Forex Markets

Binary options in forex are available from exchanges such as Nadex, which offers them on the most popular pairs such as USD-CAD, EUR-USD, and USD-JPY, as well as on a number of other widely-traded currency pairs. These options are offered with expirations ranging from intraday to daily and weekly. The tick size on spot forex binaries from Nadex is 1, and the tick value is $1.

The intraday forex binary options offered by Nadex expire hourly, while the daily ones expire at certain set times throughout the day. The weekly binary options expire at 3 P.M. on Friday.

For forex contracts, Nadex calculates the expiration value by taking the midpoint prices of the last 25 trades in the forex market, eliminates the highest five and lowest five prices, and then takes the arithmetic average of the remaining 15 prices.

Examples of Binary Options in Forex

Let’s use the EUR-USD currency pair to demonstrate how binary options can be used to trade forex. We use a weekly option that will expire at 3 P.M. on Friday, or four days from now (or Monday). Assume the current exchange rate is EUR 1 = USD 1.2440.

Consider the following scenarios:

1. You believe the euro is unlikely to weaken by Friday and should stay above 1.2425. The binary option EUR/USD>1.2425 is quoted at 49.00/55.00. You buy 10 contracts for a total of $550 (excluding commissions). At 3 P.M. on Friday, the euro is trading at USD 1.2450. Your binary option settles at 100, giving you a payout of $1,000. Your gross gain (before taking commissions into account) is $450, or approximately 82%. However, if the euro had closed below 1.2425, you would lose your entire $550 investment, for a 100% loss.

2. You are bearish on the euro and believe it could decline by Friday, say to USD 1.2375. The binary option EUR/USD>1.2375 is quoted at 60.00/66.00. Since you are bearish on the euro, you would sell this option. Your initial cost to sell each binary option contract is, therefore, $40 ($100 – $60). Assume you sell 10 contracts, and receive a total of $400. At 3 P.M. on Friday, let’s say the euro is trading at 1.2400.

Since the euro closed above the strike price of $1.2375 by expiration, you would lose the full $400 or 100% of your investment. What if the euro had closed below 1.2375, as you had expected? In that case, the contract would settle at $100, and you would receive a total of $1,000 for your 10 contracts, for a gain of $600 or 150%.

Additional Basic Strategies

You do not have to wait until contract expiration to realize a gain on your binary option contract. For instance, let’s say by Thursday the euro is trading in the spot market at 1.2455, but you are concerned about the possibility of a decline in the currency if U.S. economic data to be released on Friday are very positive. In this case, your binary option contract (EUR/USD>1.2425), which was quoted at 49.00/55.00 at the time of your purchase, is now at 75/80. Therefore, you could sell the 10 option contracts you had purchased at $55 each, for $75, and book a total profit of $200 (or 36%).

You can also put on a combination trade for lower risk/lower reward. Let’s consider the USD/JPY binary option to illustrate. Assume your view is that volatility in the yen – trading at 118.50 to the dollar – could increase significantly, and it could trade above 119.75 or decline below 117.25 by Friday. You, therefore, buy 10 binary option contracts (USD/JPY>119.75, trading at 29.50/35.50) and also sell 10 binary option contracts (USD/JPY>117.25, trading at 66.50/72.00). Therefore, you pay $35.50 to buy the USD/JPY>119.75 contracts, and $33.50 (i.e., $100 – $66.50) to sell the USD/JPY>117.25 contracts. Your total cost would be $690 ($355 + $335).

Three possible scenarios arise by option expiration at 3 P.M. on Friday:

  1. The yen is trading above 119.75. In this case, the USD/JPY>119.75 contract has a payout of $100, while the USD/JPY>117.25 contract expires worthless. Your total payout is $1,000, for a gain of $310 (or about 45%).
  2. The yen is trading below 117.25.In this case, the USD/JPY>117.25 contract has a payout of $100, while the USD/JPY>119.75 contract expires worthless. Your total payout is $1,000, for a gain of $310 (or about 45%).
  3. The yen is trading between 117.25 and 119.75: In this case, both contracts expire worthlessly and you lose the full $690 investment.

The Bottom Line

Binary options are a useful tool as part of a comprehensive forex trading strategy but have a couple of drawbacks in that the upside is limited even if the asset price spikes up, and a binary option is a derivative product with a finite lifespan (time to expiration).

However, binary options have a number of advantages that make them especially useful in the volatile world of forex. For starters, the risk is limited (even if the asset prices spikes up), the collateral required is quite low, and they can be used even in flat markets that are not volatile. These advantages make forex binary options worthy of consideration for the experienced currency trader.

Types of Binary Options

Binary options in the US – regulated and exchange-traded only.

The only way to trade binary options legally in the United States is on a CFTC-regulated, United States based exchange.

Binary options are sometimes offered by a broker. Nadex is different and offers a sharp contrast.

We offer a revolutionary approach to trading for the active short-term trader. We do it as a well-regulated, leading US based binary options exchange.

This is an important difference you will want to understand.

Our job as an exchange is to match buyers and sellers across a wide range of active global markets.

We never take the other side of a trade, but many brokers do. What that means for you is if you trade with a broker, they could be on the other side of your trade and profit only if you fail.

Our interest is in supporting a dynamic marketplace built with the short term, active trader in mind. We take our role seriously as the leading US based exchange offering binary options.

As a leading exchange, we want you to have everything you need to trade. We offer different strikes, timeframes and markets to choose from. It’s why we provide both a robust desktop platform and a brand new mobile app specifically built for short term traders.

And it’s the reason we work to offer such wide access to dynamic trading opportunities across all the markets you love.

Volatility and binary options.

Volatility moves markets, drives trading decisions and of course can make things fun.

The ability to harness that volatility means opportunity when you are trading.

It’s why we created our binary options in a way to allow exposure to volatility with a simple, easy to follow approach.

Our binary options provide unique opportunities to make short term trades and capture volatility, while also providing the flexibility to close positions early and the control to allow traders to set their own level of risk.

One of the ways binary options offer exposure to volatility is based on the pricing of the contract relative to the underlying market.

The more active the underlying market, the more movement in the binary option’s price and even in relatively flat underlying markets, the at-the-money binary options can be volatile.

We are offer a wide range of opportunities to trade based on volatility with binary options. It’s why we create more strike prices and offer more contracts on a broad range of active global markets.

Different timeframes to trade binary options.

We believe traders should have straightforward access to multiple global markets around the clock.

And we want to provide multiple time frames within our 23 hour trading day for you to trade.

Choose timeframes lasting 5 minutes to two hours and up to a week with plenty of opportunities in between.

Trading at Nadex is dynamic and markets can move fast.

For many, that type of fluid activity is exactly why they started trading.

We’ve created a vibrant marketplace that provides the variety to trade stock indices, forex, and commodities from a single account.

But the opportunities to trade with us really grow when you consider all of the time horizons our contracts cover and the number of strikes we offer in each market.

While binary options are sought by day traders wanting trades in short time horizons, Nadex offers a lot of variability and choices when it comes to the length of our short term contracts with multiple opportunities to trade throughout the day and the week.

Each time frame has its advantages.

Traders wanting to harness volatility in flat or trending markets like shorter frames because as the market gets closer to expiration, the price of the binary can fluctuate with increased volatility.

This makes for very active and exciting market action.

If you want to take a position that spans a few hours, or a day or week, you can do that too.

This enables you to trade based on a variety of different strategies. And you’ll always have the flexibility to close positions early to take profits or limit losses.

How Does Trading Binary Options Work

Posted on October 16, 2020 by J Crawford in Education, Options | 0 Comments

How Does Trading Binary Options Work

What is binary options trading?

Trading binary options is simply a yes or no situation. Investors speculate whether the value of an underlying asset will, at a given point in time, be above or below a specific price. Traders, therefore, are able to place their trades depending on whether they believe the value will be higher or lower. This makes it one of the easiest financial assets to trade in.

As a result of the simplicity, a lot of newcomers and traders in the financial markets have found binary trading quite appealing. However, don’t let the simplicity fool you. You must take time, study the market and understand how binary options work so that you can be able to get the most out of your investment. This also means understanding the appropriate markets you can invest in, the right time to enter into a position, the pros and cons of binary options trades and the companies that are licensed to offer binary options trades to US traders.

The structure of binary options from outside the US is not the same as the ones traded in the US exchanges. As a trader, you should fully understand the potential expected outcome when you plan to hedge or speculate on binary options.

Understanding US Binary Options

Using a yes or no proposition, binary options allow investors to trade in markets that have a capped profit potential and capped risk. Take the example of someone investing in gold. You might ask yourself whether the price of gold at 1.30 pm today, will be higher than $1250.

If the trader believes the price will be higher, they can go ahead and purchase the binary option. However, if the trader believes the price will be lower, they can sell the binary option.

Binary options are priced between $0 and $100. Like any other financial instrument, binary options have asked and bid prices.

If at 1 pm, the binary option above is trading at a bid price of $42.50 and an offer price of $44.50, this means that by buying the binary option, the trader will pay $44.50, and if the trader decides to sell, they will sell at $42.50.

If the trader buys the option at $44.50, and at 1.30 pm, the price of gold is more than $1,250. The option will expire, and at that point, it will be valued at $100. The trader, therefore, will make a profit of $55.50 ($100 – $44.50). After accounting for the transaction fees, what they remain with is referred to as being in the money.

Should the price be less than $1,250 at 1.30pm, the option will expire at $0. As a result, the trader will lose the $44.50 that they had invested in the binary option. This is referred to as being out of the money.

Up until the binary option has expired the offer and bid prices will always keep fluctuating. Traders, therefore, are able to close their positions at any given time before the option expires so that they can lock in their profits. If the trader foresees a loss, they can also close the trade before the option expires, so that they can reduce their loss exposure, as opposed to losing the entire investment.

A Zero-Sum Game

In binary options trading, each trade will eventually settle at $0 or $100. If the position turns out to be false, the trade will settle at $0. If the position is true, the trade will settle at $100. What this means is that the potential value of a binary option is $100. Being a zero-sum trade, your loss becomes someone else’s gain, and someone else’s loss becomes your gain.

Every binary options trader puts up capital for their trade to come through. In the example we used above, by buying the option at $44.50, this means that someone else had to sell the option to you. If the option eventually settles at $0, your highest risk exposure is $44.50.

On the other hand, the person who sold you the option has a risk exposure of $55.50 if the option settles at $100. If the trader chooses, they can purchase several contracts.

Let’s give another example, of the NASDAQ US Tech 100 Index > $3,784 at 11 am.

The bid and offer price, respectively are $74.00 and $80.00. In case the trader believes that the index will rise higher than $3,784 at 11 am, they can purchase the option at $80.00. Another idea is to bid lower than $80, in the hope that someone can sell at the offered price.

However, if the trader believes that the index will fall below $3,784 at 11 am, they can choose to sell the option at $74.00, or place an offer that is slightly higher than $74.00, in the hope that someone can purchase it from the trader.

Should the trader sell at $74.00, expecting that the index will fall below the strike price of $3,784 by 11 am, they can choose to buy or sell multiple contracts if they so wish.

How to Bid and Ask Prices Are Determined

Traders try to establish the probability of their expected positions holding, and it is as a result of this that they eventually determine the bid and ask prices. Simply put, in case the ask and bid price on an option are $89 and $85 respectively, the traders expect that there is a high chance that the outcome of the option might be yes, and the option will subsequently expire at $100. In case the bid and ask prices are close to $50, and the traders are not sure whether the binary will expire at $100 or $0, the odds are even.

Assuming that the bid and ask prices are $10 and $15, this is an indication that the traders expect the outcome to be no, and as a result, the option will expire at $0. In such a scenario, the buyers are open to risking a small sum instead of a higher gain. Those who are selling will be making a small profit, which is almost certainly guaranteed, for a big risk.

Where Are Binary Options Traded?

The first legal US exchange specifically for trading in binary options is the Nadex Exchange. Nadex has a unique trading platform that is browser-based, where traders can use either the live account or demo account to familiarize themselves with the platform.

On the Nadex exchange, traders have access to real-time charts, and access to the current prices of binary options in the market.

Apart from the Nadex exchange, traders can also access binary options from the Chicago Board Options Exchange (CBOE). If you have a brokerage account that is approved to trade in options, you can use your normal trading account to trade options. However, you should be aware that not all the brokers you come across offer binary options trading.

Fees

It costs $0.90 to enter or exit a Nadex trading contract, with the fees capped at $9. This means that if you choose to purchase 20 contracts, the highest you will pay to enter or exit the position is $9.

Should you choose to hold your trade until it is settled, and you end up in the money, the exit fee is assessed at the expiry of the position. However, should you hold the trade until it is settled, and you end up out of the money, you will not be charged an exit fee.

There are several option brokers through which you can trade your CBOE binary options and each of these charge unique commissions.

Choose Your Binary Market

There are different classes of assets that can be traded through binary options. On Nadex, you can trade in most of the major indices like the Dow 30, Nasdaq 100, S&P 500 and Russell 2000. You also have access to global indices like the Japan 225, Germany 30 and FTSE 100 for the UK.

You can also place trades on different forex pairs like AUD/JPY, AUD/USD. EUR/JPY, GBP/USD and so forth.

Nadex also lists commodity binary options that are pegged on the prices of silver, copper, gold, natural gas, soybeans, corn, and crude oil. You can also trade in news events, speculate on whether the Federal Reserve will raise or lower its rates, whether the nonfarm payrolls or jobless claims will be higher or lower than the current consensus estimates.

There are two binary options that are available for trade on the CBOE; BVZ, a volatility index option that is based on VIX, the CBOE volatility index, and the S&P index from the S&P 500 index.

Choose Your Investment Timeframe

You can choose Nadex binary options in the asset classes above that to expire in different categories, weekly, daily or hourly.

Hourly options are perfect for day traders. This is because they can get returns even when the market is quiet, by predicting the market direction in the stipulated time.

Daily options expire at the close of trading for that day. These are ideal for day traders or investors who want to hedge forex, stock or commodity based on the movement of that day.

Weekly options expire at the close of business for that trading week. These are ideal for swing traders and day traders, especially when the expiry gets closer on Friday in the afternoon.

If you invest in event-based contracts, these expire soon after official news related to that event is released. Therefore, traders in such events will assume a position in the option, up until the event expires.

Advantages and Disadvantages

Forex and stock markets experience slippage and price gaps from time to time, which can be very risky for traders. In the case of binary options trading, however, there is a cap on the traders’ risk exposure. What this means is that it is impossible for the trader to lose more than the value of the trade.

Even in a quiet market scenario, traders can still enjoy some good returns in a binary options market. On the contrary, it is very difficult to make a profit in a stock market or on forex pairs in a quiet or slow market. Besides, you already know the payouts in a binary options market ahead of time.

Say you purchase a binary option at $20. This position can settle at $0 or $100. This means that you can either lose $20 or earn $80 on this investment. Statistically, the 4:1 reward to risk ratio is impossible to be replicated in a stock or forex market.

Given all these positives, one downside to binary options trading is that there is a cap to your expected gains. Binary options can only earn you $100 at most. Forex and stock trades, on the other hand, have infinite possibilities. Perhaps the best way to earn more from binary options would be purchasing several contracts.

There are no day trading limits applicable on binary options trades. Besides, since the maximum you can invest is $100, binary options trades are open even for traders with limited finances. You only need a $100 deposit to trade on Nadex.

Binary options are derivatives traded on underlying assets that the trader does not own. As a result, the trader has no voting rights and earns no dividends, which they would be entitled to if they owned the stock.

Trading Volatility

You can use binary options as an opportunity to trade in the volatility of the underlying market, by limiting your exposure to risk especially if the underlying market is experiencing a volatile environment.

You can also use binary options to trade in market directions using out of the money strikes. This means that the cost of entry is cheaper. Should the underlying market be higher than you anticipated or expires above the strike price for the buyer, at or below the strike price for the seller, the contract will expire at $100.

There is no limit to your earning potential when you are trading the underlying market. However, with binary options, you have a better alternative for trading with the expectation of a good return and limited risk exposure.

Low Volatility/Flat Market

If the trader has reason to believe that the market will stay flat or trade sideways, they can choose to trade in binary options that are in the money. These are trades that feature low returns and high entry costs because of the capped payout when they expire.

If the market remains flat, the option stays in the money. The contract will expire at $100. If the trader pays $80 for the option, the net profit, exclusive of trading fees upon expiry will be $20.

Conclusion

Trading in binary options is a very simple yes or no scenario. The gains or losses depend on the purchase and selling price, and whether or not the option will expire at $0 or $100. Risk and rewards in binary options trading are capped.

Traders have the opportunity to exit a position before the option expires, either to take a higher profit or to reduce their risk exposure. In the US, binary options are traded through the CBOE and Nadex exchanges. Be very careful because any foreign company that attempts to encourage a US resident to trade in binary options is most probably operating an illegal business.

There is a very low barrier to entry in binary options trade. However, do not let this simplicity fool you. Like any other investment, make sure you are trading with money that you can afford to lose. When you are starting out, use the demo accounts to learn how to trade in binary options before you can start trading with real money.

Understanding Binary Options

Monday, January 27, 2020

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Binary options are a simplified form of options trading. Options trading can be a little difficult to understand, but essentially when you trade options, you are buying or selling contracts that give you the right, or the obligation, to make certain asset trades in the future. Binary options remove much of this complexity, allowing you to bet on whether the value of an asset will be higher or lower than a target price by a given deadline. Simple, right? Let’s take a closer look at how binary options work and whether they make sense for your trading strategy.

In this guide, we’ll cover:

What are binary options?

Binary options — like all options — are a financial instrument based on the value of an underlying asset. This underlying asset can be a stock, a bond, a currency exchange rate or the price of gold. When you buy or sell binary options, you’re making a bet about the future price of the underlying asset.

Let’s say the price of gold right now is $1,450 an ounce, and you think it will be higher than $1,500 by the end of the week. You could buy a binary option with a strike price of $1,500 and a deadline of Friday at 5:00 p.m. If the price ends up higher than $1,500 on Friday at 5:00 p.m., you would make money. If the price ends up at $1,500 or lower, you lose money.

How are binary options priced?

Binary options are priced between $0 and $100. Their value is based on how likely the underlying asset will be above the strike price by the option deadline. If the actual value of the asset is above the strike price at the deadline, then the option is worth $100. If it’s below the price, then the option is worth $0.

Before the deadline, the value of the option will fluctuate between $0 and $100, depending on how likely the final result looks. If it looks very likely that the final price will be above the strike price, then the option price will be closer to $100. If it looks unlikely, the price will fall closer to zero. If you own a binary option and want to get out before the expiration date, you can sell the contract to another investor at the current market price.

How do you buy and sell binary options?

When it comes to binary trading, you can be either a buyer or a seller. Let’s go back to the example of gold going up to a value of $1,500. Imagine that the option currently trades at $45 — that means you’d pay $45 to bet that the price will end up higher than $1,500 by the deadline. If the price ends up higher, you’ll receive $100, giving you a profit of $55 (100 – 45 = 55.) If the price ends up at or below $1,500, your option value falls to $0, meaning that you’d lose your $45 investment.

On the other hand, if you think the price of gold will not be above $1,500, you could take the opposite position by selling the $45 option to another investor. This person would give you the money upfront, and if the price ends up below $1,500, you keep the $45 profit. If the price ends up above $1,500, you need to pay the option buyer $100, so your loss is $55.

Where can you trade binary options?

Since binary options are a newer, more specialized type of investment, you won’t find them with just any online stock broker. One way to make these investments is through the North American Derivatives Exchange (Nadex). This exchange is supervised by the Commodity Futures Trading Commission, a government regulatory agency.

There are other online websites that allow binary option trading, such as Binary.com and IQ Option. But Braden Perry, a former enforcement attorney at the Commodity Futures Trading Commission (CFTC), warns you have to be careful.

“Many internet-based platforms have surged into the market, and with that surge, the opportunity for fraudulent promotional schemes, overstatement of returns, and the failure to pay out for the wins have increased,” said Perry. “Furthermore, some actors are using manipulative software to rig the system, so winning bids end up losing.”

As he recommends, before opening an account with a website, you should check their registration and disciplinary history through BrokerCheck or the Background Affiliation Status Information Center, two databases run by regulatory agencies. You could also perform web searches to determine if your potential broker has been accused of wrongdoing.

What are the fees for trading binary options?

The fees for trading binary options depend on the broker or trading platform. They may charge a flat transaction cost, like $1 for each contract that you buy or sell. They might also charge a fee when they pay out the $100 earnings at a contract’s expiration deadline, known as a settlement fee. Once again this could be $1 per contract, charged to the investor who made the correct bet on the option.

Another way brokers can make money is by using a bid-ask spread, which means the price to buy an option is higher than the price to sell an option. For example, it costs $45 to buy but you would only receive $43 by selling. The $2 difference goes to the broker or the trading platform.

Finally, the broker/platform could charge additional miscellaneous fees for other actions, such as setting up your account or processing withdrawals.

Advantages of binary options

  • Simple to understand: Binary options are pretty straightforward compared to other options trading strategies — either your price prediction comes true and you make money, or it doesn’t and you lose money.
  • Fixed risk: Going into each trade, you can calculate exactly what your loss would be in the event that your prediction was wrong. With some other trading strategies, like short selling a stock, your possible loss is potentially unlimited; with binary options, it’s a fixed risk.
  • Higher potential returns: Investing is generally a tradeoff between risk and return, where higher risk investments tend to have a higher potential return. Since binary options can be relatively risky, they are also potentially lucrative. Due to the higher risk the typical returns on investments are much higher than foreign exchange trading — typically 60% to 90%, compared to 10% for forex.

Downsides of binary options

  • High risk: With the “all-or-nothing” payout system, you can lose money very quickly when trading binary options if your predictions turn out badly. This simplicity may be a downside for new investors, who could lose a lot of money through inexperience.
  • Bad market actors: You need to be careful about which trading platform you use. Binary options are a relatively new investment and still not regulated as closely as more established markets, so the opportunity for fraud can be higher.
  • Broker limitations: There could be limits on how much you can invest per trade. Only some brokers allow big investments, restricting them to clients with large balances. If you want to make larger investments, you may need to sign up with multiple platforms as you could go over the maximum limit on just one.

Who should trade binary options?

Binary options are a better fit for investors with a high-risk tolerance, those more willing to lose money in the short-term in exchange for making a larger profit in the future. If you’re scared about the idea of short-term losses, binary options are likely not a good fit.

In addition, you need to be willing to put in lots of research for your binary option trading decisions. You are competing against other investors, including Wall Street professionals, who are only accepting your buy/sell moves because they bet the opposite will happen and they’ll make money off you. It’s a tough market and takes hard work to make a profit.

Even if binary options sound like a good fit for your personality, Nicholas Hofer, a CFP® and President of Boston Family Advisors, still believes you should think twice before getting started: “I wouldn’t recommend this strategy for traditional investors as it’s more like gambling.”

He thinks binary options are a misuse of what options should be used for, as a hedge against risk and losses. “Unfortunately,” he noted, “‘hedging’ is now often viewed as a way to generate alpha [above market returns] rather than a way to reduce risk.”

Learn more about binary options

If you’d like more help to learn about binary options, there are online courses and bootcamps that can give you trading strategies and tips. You could also hire a financial advisor to help set up your options trading account and give you recommendations for trades.

The complicated part is not understanding how binary options work, but rather how to make good predictions. That means studying up on market trends, closely following financial news and learning everything you can about potential trades so you can make better predictions than the average investor.

If you do decide to move forward with trading binary options, make sure to do so responsibly — only invest money you can afford to lose. With research and some luck, you can make money quickly through binary options trading. But if you aren’t careful, you can lose it just as fast.

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Investing

Review of Vanguard Personal Advisor Services

Thursday, April 2, 2020

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Vanguard Personal Advisor Services is the investment advisory service offered through Vanguard Advisers, a wholly owned subsidiary of Vanguard, Inc., one of the world’s largest investment management firms. Vanguard Personal Advisor Services focuses on serving individual investors, including high net worth individuals. Clients work with human advisors, but also have access to Vanguard’s digital advice platform.

All information included in this profile is accurate as of April 2, 2020. For more information, please consult Vanguard Personal Advisor Services website.

Assets under management: $83.7 billion
Minimum investment: $50,000
Fee structure: A percentage of AUM; one-time financial planning fee for some workplace retirement plan participants
Headquarters: 100 Vanguard Boulevard
Malvern, PA 19355
vanguard.com
800-416-8420

In this review, we’ll cover:

Overview of Vanguard Personal Advisor Services

Vanguard Personal Advisor Services is the investment advisory arm of Vanguard Advisers, a wholly owned subsidiary of Vanguard. The advisory part of the business launched in 2020, decades after Vanguard was founded in 1975 by the late John “Jack” Bogle.

Bogle introduced the first-ever index fund to retail investors and encouraged them to buy and hold a diverse basket of low-cost investments. Though Bogle passed away last year, the firm aims to continue his legacy.

Vanguard Personal Advisor Services is focused on providing ongoing advisory account services for individual investors as well as point-in-time financial planning for retirement plan participants. Vanguard Personal Advisor Services oversees $83.7 billion of Vanguard Advisers’ total $221 billion in assets under management (AUM).

Which types of clients does Vanguard Personal Advisor Services serve?

Vanguard Personal Advisor Services primarily serves individuals, including high net worth investors and those who get services through their workplace retirement plans. For reference, the SEC defines high net worth individuals as those with at least $750,000 under management or a net worth above $1.5 million.

The individual investors either come for financial planning via their workplace 401(k) plans, or they are retail investors with an IRA or other account with Vanguard. In the latter case, there’s a minimum investment requirement of $50,000. The firm does not provide financial planning services to clients who do not have accounts with Vanguard.

Services offered by Vanguard Personal Advisor Services

Vanguard Personal Advisor Services offers financial planning and point-in-time advice to participants in Vanguard workplace retirement plans. Those participants are not eligible for managed account services for assets in those plans.

Clients who have an IRA or other retail account worth at least $50,000 with Vanguard can use Vanguard Personal Advisor Services to get a customized financial plan and enroll in the firm’s “ongoing advised services.” That gives an advisor the authority to make trades on the client’s behalf in accordance with their agreed-upon plan. It also allows participants to call advisors about advice on financial issues that arise as they hit life’s milestones, such as buying a new house or having grandchildren.

Here is a full list of services offered by Vanguard Personal Advisor Services:

  • Investment advisory services/portfolio management
    • Asset allocation strategies
  • Financial planning
    • Retirement planning
    • Estate planning
    • Charitable giving
    • Succession planning
    • Tax planning and management

How Vanguard Personal Advisor Services invests your money

All participants in Vanguard Personal Advisor Services get a financial plan, including the creation of a portfolio with a diverse asset allocation that reflects your personal financial situation, goals and risk tolerance. To do that, the advisors rely on an algorithm, which recommends an investing track and glide path, or asset allocation strategy, that meets your needs. The investment tracks range from very conservative to very aggressive, and the glide paths adjust over time, depending on your goals.

Each portfolio includes a variety of Vanguard index funds with holdings in a specific asset class, such as international stocks or short-term bonds, but it does not recommend investments in individual stocks or bonds. In addition to diversification, the portfolios take taxes into account, aiming to keep the investments as tax-efficient as possible. In general, Vanguard encourages a long-term, buy-and-hold approach rather than switching strategies based on market performance.

Fees Vanguard Personal Advisor Services charges for its services

Employees who use Vanguard Financial Planning Services through their workplace retirement plan pay $1,000 for the service if they have less than $50,000 in assets with Vanguard, and $250 if they have $50,000 to $500,000 with Vanguard. The firm may waive that fee for clients who are over the age of 55 or who have more than $500,000 invested with Vanguard.

For clients of Vanguard Personal Advisor who don’t have a workplace retirement plan and are enrolled in the ongoing advised services, the firm charges a percentage of assets under management. Rates run from 0.30% for accounts of less than $5 million to 0.05% for accounts over $25 million.

Assets under management Annual rate
Under $5 million 0.30%
$5 million to under $10 million 0.20%
$10 million to under $25 million 0.10%
$25 million and over 0.05%

In addition to the above fees, you may also pay fund fees, annuity fees, account fees or retirement plan fees.

Vanguard Personal Advisor Services’s highlights

  • A dedication to low fees. Vanguard literally invented index investing, and the firm remains dedicated to keeping its fees low. Its fee schedule is substantially lower than the industry average total fee rate of 1.17%, according to RIA in a Box.
  • Excellent reputation. Vanguard Personal Advisor Services was named the “Brand of the Year” in 2020 for digital investing by Harris Poll EquiTrends. The title was awarded based on consumer devotion and respect.
  • Fee-only model. Advisors don’t receive commissions for selling products or making recommendations, so they do not have a financial incentive to do so, which can pose a potential conflict of interest.

Vanguard Personal Advisor Services’s downsides

  • High minimum balance for young investors. You need to have $50,000 invested with Vanguard (outside of your workplace retirement plan) to access its investment management services if your employer is not enrolled in the program. That could be a high bar for young investors or for those who haven’t been saving for long.
  • Less potential upside: Since Vanguard’s investment philosophy is built on a buy-and-hold strategy comprised of low-cost funds, you can expect your investments to perform in line with the markets, but advisors aren’t actively trading to try to “beat the market.”
  • Large digital component: While you’ll work with a human advisor to create your initial plan, future check-ins may take place via the platform’s digital interface. Clients with $500,000 or less in assets do not have an assigned financial advisor, though they can call to schedule an appointment at any time.

Vanguard Personal Advisor Services disciplinary disclosures

Vanguard Personal Advisor Services does not have any disciplinary disclosures. All registered investment advisors are required to disclose any legal, regulatory or criminal events in their Form ADV, documents they file with the SEC.

Vanguard Personal Advisor Services onboarding process

To learn more about working with Vanguard, you can call (800) 414-8740 or create an account online to set up an appointment to talk with an advisor. In your initial conversation, you’ll discuss your financial situation and goals, and share information about all your financial accounts. Your advisor(s) will spend a few weeks creating a plan, and then you can decide whether you want to implement that plan and allow them to manage the account on your behalf.

If your portfolio is worth less than $50,000, you’ll work with a team of advisors, while those with a portfolio worth more than $500,000 have a specific, dedicated financial advisor. Advisors will check on your portfolio on a quarterly basis, making adjustments as needed to your asset allocation. You can check in online or call your advisor or team at any time.

Is Vanguard Personal Advisor Services right for you?

The firm may be a good choice if you’re an investor with at least $50,000 looking for a low-cost, low-maintenance way to manage your money (or your employer has chosen Vanguard as its retirement plan provider). Vanguard Personal Advisors offers extremely low fees and boasts a clean disciplinary record.

For investors who have less than $50,000, or who are looking for a more active approach to asset management, another firm might be a better fit. As is always the case when choosing a financial product or service, it’s important to shop around, ask questions of financial advisors and make the choice that’s best for your unique situation.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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