The analysis and operation of binary options, an important investment tool in financial trading: here’s what you need to know.
For years, binary options have represented an accessible and straightforward form of investment, attracting both novices and experienced traders thanks to their simplicity and potential for high returns. It must be said, however, that their functioning has evolved significantly over the years, influenced by stricter regulations and a greater awareness of the risks associated with this financial instrument. In fact, trading binary options is certainly not recommended for all investors.
We answer the many questions about binary options, trying to understand in detail how they work and when they are a suitable investment option and solution.
What are binary options: meaning and definition
Binary options are derivative financial instruments that allow investors to speculate on the future price direction of an underlying asset within a predetermined period of time.
The term "binary" comes from the fact that there are only two possible outcomes.
- Call Option (High)): The investor expects the asset’s price to rise by the option’s expiration.
- Put Option (Low): The investor expects the asset’s price to fall by the option’s expiration.
It’s easy to see that this type of investment allows you to bet on the performance of an underlying asset, such as currencies, commodities, or market indices, with only two possible outcomes: profit or total loss of your invested capital.
This "all-or-nothing" structure has made binary options particularly attractive to those seeking quick profits, but it has also raised concerns about their similarity to gambling. As mentioned, therefore, their speculative nature and high risk of loss have raised significant concerns over the years.
In response to the associated risks, many jurisdictions have banned binary options. The European Securities and Markets Authority (ESMA) has banned the marketing and sale of binary options to retail clients since 2018. In Italy, Consob has prohibited the provision and marketing of binary options to retail traders since July 2019. Australia and the United Kingdom have also implemented similar restrictions. In the United States, regulators have issued numerous warnings about the dangers of unregulated platforms.
These bans were introduced to protect investors from deceptive practices and the high losses that can result from binary options trading. As of 2025, these restrictions are still in effect and have been adopted by other jurisdictions, making binary options even less accessible to retail investors.
How do binary options work?
From the explanation, it’s clear that binary options are among the easiest financial instruments to understand. Once you understand the role and objectives of options, you can understand how they work.
First, let’s clarify the underlying assets of binary options, which - for example - can include:
- currencies (Forex): pairs such as EUR/USD or GBP/JPY;
- commodities: gold, silver, oil, etc.
- stock indices: such as the FTSE 100 or the S&P 500;
- individual stocks: shares of publicly traded companies such as Apple or Google.
According to the standard process, the trader makes a prediction on a specific financial event, such as whether the price of an underlying asset will be above or below a certain level (strike price) at a specific time. The main types of binary options include:
- Top/Down: a bet on whether the price will be above or below a market price at expiration;
- Touch: a prediction on whether the price of an underlying asset will reach a specific value by expiration;
- Interval: a bet on whether the value of an underlying asset will remain within a set range.
Furthermore, these options can be exercised during their lifetime (American Style) or only at expiration (European Style).
The payoff structure is defined from the outset, and if the prediction is incorrect, the entire invested capital is lost.
How to trade binary options: the basic step-by-step
As mentioned many times, despite the risk involved, binary options trading is relatively simple compared to other financial instruments. The typical process involves the following steps.
- Choice of underlying asset: The investor selects an asset on which to base their prediction.
- Determination of expiration: Binary options have variable expiration times, ranging from 60 seconds to several weeks.
- Investment amount: The investor decides how much capital to allocate to the trade.
- Prediction of price direction: You choose whether the asset’s price will rise (Call) or fall (Put) by expiration.
- Trade Outcome: At expiration, if the prediction is correct, the investor receives a predetermined payout. Otherwise, they lose their entire investment.
For example, suppose a trader predicts that the price of gold will rise in the next 30 minutes. They decide to invest €100 in a Call binary option on gold with a 30-minute expiration and an 80% payout. If the price of gold has actually risen at expiration, the trader will receive €180 (€100 initial capital + €80 profit). If the price has decreased or remained unchanged, they will lose their entire €100 investment.
It’s important to note that, unlike traditional options, with binary options, the size of the price movement does not affect the payout. What matters is only the direction of the movement relative to the strike price at expiration.
Investing in Binary Options: How to Do It and When It’s Worth It
Investing in binary options requires a thorough understanding of the financial markets and trading strategies. To get started, you need to choose a reliable broker, although it should be noted that many binary options trading platforms operate outside of standard regulations, increasing the risk of fraud and manipulation. Another crucial aspect is risk management: given the high volatility and risk of total capital loss, it’s essential not to invest more than you can afford to lose.
Unlike option contracts on regulated markets, binary options are illiquid, forcing investors to wait until expiration to see the outcome of their bet.
Investing in binary options can be only suitable for experienced traders who can dedicate time and energy to constantly monitoring the markets and developing well-structured trading strategies. Furthermore, it’s important to consider local regulations and warnings from financial regulators.
In conclusion, while binary options can offer opportunities for rapid, high profits, they also pose significant risks. It’s essential to approach them with caution, awareness, and, preferably, adequate financial education.
Original article published on Money.it Italy. Original title: Cosa sono le opzioni binarie, come funzionano e come investire
