MaxOptions delivers unmatched binary options trading platform by Spot Option. Our binary options trading expertise makes financial trading in shares, commodities, indices and Forex easy to learn, practice and trade. Our online binary options trading platform lets you trade financial markets from anywhere in the world 24 hours a day. Our financial trading forums and financial trading blogs offer you all the insight you need to succeed in trading binary options. We deliver exceptional personal service and support to help all our traders understand financial trading, review their binary options investment strategies and decide how to seize the opportunity of binary options trading in shares, equities and Forex.There are only two things I can find wrong with exchange traded binary options. The first is the term binary and the second is the term option.I say this somewhat in jest however, to get started lets clear up some of the confusion around this type of contract and take away any aura of mystique surrounding them as they can be quite simple.Lets first look at the term binary. It is a pretty simple term that basically means there are two outcomes. It could be thought of as yes/no or true/false. Unfortunately, it is very easy for those unacquainted with these contracts for this term to sound overly exotic and something that would be hard to understand when in reality, the opposite is true.Next, the term options. Traditional options can be great contracts to trade. Unfortunately again though, it is very easy for those who start to explore options to become overwhelmed very quickly. People investigating these vehicles probably first learn the simple terms of call and put. Once they have these down, it is not long before they start hearing about the greeks and get into concepts such as delta, gamma, theta, et al. And then there are the complicated pricing models such as Black-Scholes. Ultimately theyll hear about strategies such as long call butterfly, iron condor or jade lizard -- terms that sound more like they belong in a zoology textbook than something used to build a trading strategy. It becomes very easy to see how the world of options can quickly become a whirlwind of confusion.On the other hand, the characteristics of binary options, which well explore in depth below, actually simplify the world of options. But do not let the simplicity of these options fool you or lead you to believe they are mere gambling. They are, in fact, serious trading instruments. The simplicity of the contract serves as very good starting ground for those learning options or even how to trade the markets in general. Yet, the veteran futures or options trader can also benefit by more complex strategies using these contracts.Lets start with where.At the time of this writing, there are two exchanges in the US that list binary options. There is the Chicago Board Options Exchange (CBOE) which is an SEC-regulated exchange, and the North American Derivatives Exchange (NADEX), a CFTC-regulated exchange. While both list binary options, the binary options listed on CBOE are typically designed more for the institutional trader while the contracts listed on Nadex are geared more toward the active individual trader. For the sake of this article, the examples I use will be based on the contracts offered at Nadex, however, most of the principles apply to either exchange.So what are binary optionsBinary options are made up of three components. There is an underlying market such as crude oil. This is followed by a strike price or condition such as 99.00. The third component is an expiration time, for example, 2:30 PM on 11 February. So the contract in this example would look like Crude Oil 99 at 2:30 PM on 11 February.This contract is basically asking the question, do you think the price of crude oil will be greater than 99.00 at expiration time (2:30 p.m. on the February 11), yes or no (Notice, even the decision is binary.)If you think the answer to that question is yes, you would buy the option. If you think the answer is no, you would sell the binary option.How are they pricedAll binary options listed on Nadex have a total value of 100.00 and the price can range from the floor of 0.00 to the ceiling of 100.00 with each whole number between 0 and 100 representing 1.00. When trading binary options, it may help to think of the price as the probability of the question being answered as a yes, or true.Using our previous example, if the crude oil market is trading at 98.00 and we have a binary such as Crude Oil 99 at 2:30 PM, we may see a price where we can buy this contract at 35. In this case, the market is basically telling us that it thinks there is roughly a 35 chance of that statement being true, and thus settling at expiration at 100.As a general rule of thumb, anytime the underlying market is trading below the strike price (condition) of the binary option, the price will be below 50 as the market typically views this as less than a 50 chance of being true. Conversely, if the underlying market -- in this example, crude oil -- is trading over the strike price, the price of the binary option will be above 50 as the market will tell us that there is a greater than 50 chance of this event happening.When buying or selling a binary option, our risk is always capped at the floor or ceiling, respectively. When buying a binary option, the worst case scenario is an outcome of zero, and so the risk is limited to the difference between the buy price and 0. When selling a binary option, our worst case outcome is 100, so our risk is capped when selling to the difference of 100 -- the sell price.In the example above, if we buy the binary contract at 35, our worst case scenario is 0 so our risk on one contract would be 35.00. If we sell a binary option at 35, our worst case scenario is 100, so our risk on one contract would be 65.00. Whatever our maximum risk is on the trade is also the collateral required to place the trade, and we can never lose any more than that.If the outcome of the binary option is true, the buyer would receive 100.00. If the outcome of the binary option is false, the seller would collect 100.00.