Options trading tends to confuse many people, especially people who are new to investing and trading. While there are complex formulas involved in options trading, almost all of that stuff takes place behind the scenes and the person doing the trading doesn’t really need to know any of it. In theory, options are very simple: they are basically a bet that, as of a certain time in the future, the price of a stock will be above or below a specified price (called the strike price).

So people attempt to profit from buying and selling options in much the same way that they try to profit from buying and selling stock, with different strategies based on whether they think price will go up or down in the future.

Some of the complicated formulas come into play when pricing options. The price of an option will change constantly as the price of the underlying stock changes, and there is also something called “time premium” built into the value of an option. What this basically means is the longer an option has until expiration, the more extra price is added into its price. When you think about it this makes sense, as an option with an expiration date far into the future has more time available for the price of the underlying stock to move above the option’s strike price. In other words, an option expiring in 5 minutes only has 5 minutes remaining for price to move above its strike price (if it hasn’t already), but an option expiring in 5 days has a much greater chance of that happening.

Binary options are a specific type of option that pay “all or nothing” depending on the price of the underlying stock at expiration.

There are a few reasons why a trader may wish to consider binary options, and these include:

Simplified profitability – if the stock price is above the strike price at expiration, you get paid. If not, you don’t. No crazy formulas to keep track of.

Limited risk – every possible outcome is known beforehand, so there are no possible surprises where you can end up owing people more money than you initially invested (something which happens from time to time with option trading, and one of the reasons why people tend to think “options can be dangerous.”

Availability – as binary options continue become more popular, there are more and more brokers who are offering them to traders.

Remember to always read the terms of your broker before beginning to trade.