They’re gaining attention among traders, but how do you trade them? Here’s one way to get started.

Though binary options have been around since 2007, over the course of the last few years, they have seen a huge growth in popularity. For those who are new to them, binary options are simply short-term option contracts with a limited risk and limited reward amount.

In their most basic structure, binaries can be seen as a form of gaming. If the trader feels that the instrument will increase, he stakes an amount at a price where he feels the market will increase to (these price levels are usually predefined by the brokerage). If price is higher by expiration, the trader will profit by a predetermined percentage amount. However, the percentage amount varies by brokerage and by volatility.

For example, if I believe the price of light crude oil will trade above $100, I may place a $20 stake that the price of crude oil will go up. Since the brokerage is offering an 80% payout on the stake amount, if light crude oil does go up and stays above $100, I will make an 80% profit on my initial stake amount of $20, which is $16. My predefined risk was $20 (the stake price) and my predefined profit target was $16.

Download the full Stocks & Commodities by Gail Mercer. (Stocks & Commodities V. 32:9 (28–32): Binary Options: Scam Or Trading Methodology?)