StockMarketInvesting.com readers often ask us for fixed income recommendations. Many have been burned in the past by having their investment portfolios being over weighted with stocks and are looking to diversify. Two stock market crashes in a single decade (2000 -2001 & 2007-2009) will have long lasting effects on the psyche of modern investors. Some studies show it will take another ten years before the pain and fear erodes enough for significant new inflows of cash to again be invested into the stock market. While this cash is sitting on the sidelines, investors want to maximize its yield. With interest rates at or near historic lows there are very few low risk options available to income investors who won’t settle for the paltry yields on US Treasuries.
Binary options are a little known but effective vehicle for investors who find themselves in this category. Binary options are comforting to investors with a low tolerance for risk. They basically offer 2 possible outcomes – either make a fixed amount of income or nothing at all. Hence the name binary (also referred to as digital options). StockMarketInvesting.com visitors who are still reeling from the last 60% decline in equities love this since they won’t suffer devastating losses again. Readers should beware however. Binary options certainly are not without their demerits. The luxury of having no downside risk comes at a cost. Binary option traders give up any upside potential above the fixed payout price. For example, if a trader buys a call option believing a stock will go up the upside return is capped whether the stock goes up 10% or 50%. A buyer of the common stock could enjoy the full upside of a 50% gain whereas the binary option buyer would have to be content with maybe a 5% gain. Binary options also have higher commission costs than stocks.
You should weigh the pros and cons of binary options to determine if they are for you. If are willing to accept the possibility of no payout when you on the wrong side of a trade in exchange for a fixed payout when on the right side then these types of options may be worth considering. One of the nice things about binary options is that you can bet on both the upside and downside by using “calls” (upside) or “puts” (downside). Some brokerages refer to calls as “up” or “Finish High” and puts as “down” or “Finish Low”.
If you are ready to try out binary options you should open up an account with a brokerage who offers trading in them. Most of the major trading companies offer digital options in a wide array of optionable investments including stocks, currencies, commodities, and indices. StockMarketInvesting.com recommends you do some research because their service levels and features vary greatly. Some of the things to look for include online guides, demo accounts, and an easy to navigate online trading platform.