Using these exotic options is not like picking up a copy of "Options Trading For Dummies" and logging on to a broker's website. Unfortunately, despite the simplicity of these derivatives, one major downside exists: The reward is always less than the risk. Traders using binary options must be right a majority of the time to make up for the few times when they are wrong. Like the futures market, trading binary options is not an occupation designed for the weak of heart.
Another downside is that binary options are traded over-the-counter (OTC), and OTC markets are unregulated, generally speaking. This means little oversight exists if there is a trade discrepancy. Traders may be subject to unethical practices, even if this is not the norm in the binary options industry. Most brokers use a well-known, external source for their quotes, so this should not be an extensive problem. Finally, the money invested into a binary option cannot be withdrawn until the time the option expires.
All these negatives must be weighed against the positive of being able to know profits and losses in advance. Weighing the risks suggests different strategies to use when trading binary options. Aside from using them to limit losses, they can be used to earn guaranteed profits for traders who are too easily seduced by the adrenaline of the moment. Losing one's head is frighteningly easy on the trading floor, and more than one trader has blown up an account by taking on more risk after consistently winning a few trading sessions has inflated his ego.
In the end, binary options deserve the moniker "exotic." They are unique creatures that must be treated with respect in order to be tamed and befriended. Traders can easily find themselves on the losing side of a trend if they do not conduct research beforehand. Binary options widen the range of choices available to a trader, and give him the ability to make profits in unusual market environments.