Options and other forms of trading necessitate knowledge. You must know how to decode the company’s financials and understand the price chart. However, not all options necessitate extensive trading expertise, especially binary options.
What is Binary Options trading?
Binary options, also known as all-or-nothing contracts, are a derivative in which the payoff depends on the outcome of a specific event. These outcomes are known as in-the-money or out-of-the-money outcomes. If the former occurs at the contract’s expiration, you win; if the latter occurs, you lose your entire investment.
Binary allows speculation on foreign exchange movements, economic events, and share prices and is available over the counter (OTC). The profit and loss are predetermined in these contracts.
Suppose the OTC offers binary options on XYZ Ltd’s price movement. The trade is where you have to say ‘yes’ or ‘no’ that the XYZ Ltd. price will go above Rs 100 on the next trading day’s closure.
You answer ‘Yes’, and the price exceeds Rs 100 on the contract’s specified date and time. You will be paid per the agreed-upon terms and conditions.
Different types of Binary Options
There are four types of binary options trading.
- High/low: In this binary option, you must choose whether the underlying asset’s price will close higher or lower on the expiration date of what it is today.
- In/out: It is also known as range options. The OTC predetermines the underlying asset’s high and low prices. So you have to speculate on whether the price will close outside or within the given range.
- Touch/no touch: Similar to in/out, the price range of the underlying asset is pre-decided. Before the contract expires, you must speculate on whether the price will touch that level.
- Ladder: They are similar to up-and-down trades. But instead of the current price, speculation must be made on the preset price levels. The payout can sometimes exceed 100%. However, they do not allow for both sides to trade.
Are Binary Options legal in India?
The Reserve Bank of India has declared not only binary options but all other forms of foreign exchange online trading illegal. Moreover, the Foreign Exchange and Management Act (FEMA) prohibits Indian-registered online trading portals from offering such options derivatives.
The decision is made in light of the various risks associated with this trade. Due to its features, there is also little room for exchanges to regulate binary options.
How to trade Binary Options in India?
Even though binary options are illegal and with no legislation governing them, you can still trade them through offshore brokers. However, if fraud occurs, you will be unable to seek relief from SEBI or any other court. Here’s how to trade them.
- Set an F&O trading account with a foreign broker who provides this service.
- Navigate to the binary trading section on the trading platform and select the underlying asset on which you want to bet.
- Speculate the price movement.
- Choose the amount you want to risk.
- The event’s outcome results in either a complete loss or a profit up to the prespecified amount.
Licensing and regulation in India
There are no SEBI-registered brokers in India. Therefore, binary options brokers are required to obtain Cyprus Securities and Exchange Commission (CySEC) licensing. Most European brokers who offer this trade are licensed under this.
Binary options are prohibited in India because they involve significant risk and are purely speculative. If you become a victim of a scam while trading in them, you will have no recourse from a court or the SEBI.