One nice feature in binary options trading is that broker platforms will generally show the profit percentage a trade is capable of generating if the final outcome is positive and your original price direction (either a CALL or a PUT) proves to be accurate. These percentages are then added to the investment amount and this creates the total payout for the trade.
For example, let’s say we place a trade with $1,000 and the winning stake that is associated with the position is 80%. If the trade closes in our favor (in the money) the payout is $1,000 + (80% of $1,000) = $1,800. In this case, the payout for the trade would be $1,800. The max payout for your trade will be clearly visible on your platform, in most cases. In the graphic below, the trading payout would be equal to 70%.
Different Payout Rates for Different Options Contracts
One thing that must be initially understood is that different options contracts will have different payout rates. So, getting an above average payout in one trade does not mean that this will be repeated in the next trade. For the most part, contracts in binary options will have payout rates of between 60% and 90%, so if you do come across rates that are below this, you should consider using another broker. In some cases, brokers will allow traders to get a partial refund on their investment if a trade ends out of the money.
The percentages for these refunds are generally low, and will be subtracted from the amount invested. Some traders will choose not to receive these refunds and this will also affect the potential payout rates. When choosing the full payout option, the following changes might be seen:
- Refund: 70% payout with a 15% refund possibility in an 85% profit trade.
- Full Payout: 85% payout with a 0% refund possibility in an 85% payout profit trade.
In some cases, you will see High Yield binary options contracts (such as High Yield Touch or High Yield Boundary) which will offer substantially higher payouts – sometimes as high as 500%. But these trades will also be associated with more trading restrictions in place to protect the broker.
Which Payouts Should You Choose?
It is common to see new traders attempt to hit the “jackpot” with one trade that has a massive payout, while others will look to build their accounts with a series of smaller payouts. So, which approach is the best choice?
Let’s look at two hypothetical examples. Trader A is looking for massive returns that enable him to quickly multiply his account size. Trader B is more conservative in approach and looks to build on small trades. The eventual goal is the same (multiplying the account), but the number of trades this will take is much larger. The question: Which trader is like to achieve the goal first? The answer, unfortunately, is that both traders have a chance of achieving the goal first. There is simply no way of knowing with guaranteed certainty if a trade will work out favorably.
So, then, is it impossible to decide on a strategy? Not exactly. Let’s assume that in both cases, the first trade works out favorably. Trader A achieves his goal and Trader B is now forced to repeat the process many times to catch up. Game, Set, Match: Trader A. But what if the reverse happens? What if the market experiences an unpredictable rise in volatility and both trades finish in the red? Now, trader A has his entire account depleted while Trader B (though bruised) will live to trade another day. If there were situations where market outcomes were 100% guaranteed, Trader A would have the best approach. Since this is not the case, most experienced traders would argue that Trader B’s conservative approach is preferable.
Conclusion: Carefully Construct Your Options Payouts and Consider a Conservative Approach
It is important to understand how binary options payouts are calculated so that you can develop a trading plan that can build your trading account over time. Certain factors (like opting for a partial refund) can influence the potential gains you can make while also giving you some added protection against substantial trading losses. All of these factors can be considered when constructing a conservative approach that allows you to improve your trading numbers over time, rather than looking to hit the “jackpot” trade on a single occasion.