The Indian stock markets along with major global indices have slipped a lot over the past few years but the Indian counterparts are said to be performing relatively better with a lower risk of an oncoming recession. The past few years have also seen a huge increase in the number of traders and investors in the Indian stock markets making trading one of the many attractive career choices for young Indians. Among the many forms of trading is Binary options trading which is relatively less popular as well as has ambiguity regarding its legalisation. Given here is the meaning of binary option trading and related details of the same.
Read More: What is option trading? Know all about it
What is binary option trading?
Binary option trading is a type of trading where you predict whether the price of an asset (such as a currency, stock, commodity, or index) will go up or down in a fixed period of time. You can make a profit if your prediction is correct, or lose your investment if your prediction is wrong. Binary option trading is called binary because there are only two possible outcomes, namely, yes or no.
For example, let’s say you think that the price of gold will be above Rs. 61,500 per 10 grams at 12:00 p.m. today. You can buy a binary option contract that pays you Rs. 1,000 if you are right, or nothing if you are wrong. The price of the contract depends on how likely the market thinks your prediction is. If the market thinks your prediction is very likely, the contract will be more expensive. If the market thinks your prediction is very unlikely, the contract will be cheaper.
At 12:00 p.m., the binary option contract expires and the price of gold is checked. If the price of gold is above Rs. 61,500 per 10 grams, you receive 1,000 and make a profit. If the price of gold is below Rs. 61,500 per 10 grams, you receive nothing and lose your investment.
Is binary option trading legal in India?
The legality of binary options trading in India is not exactly clear. As per the current regulations, binary options trading is currently not legal in India. The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) do not endorse or regulate this type of investment.
However, some traders in India still engage in binary options trading by using offshore brokers that are not regulated by Indian authorities. If traders decide to do binary option trading, there are some rules they should follow, such as using international payment methods like Skrill or Bitcoin as well as paying taxes on their profits according to Income Tax Act, 1961. Investors should be aware of the risks of binary options trading and restrictions levied by SEBI and RBI in this regard.
What are the popular binary option trading strategies in India?
Some of the common binary option trading strategies in India are mentioned hereunder.
Trend Trading
This binary option trading strategy involves analyzing the trend of an asset’s price over a certain period and making trades based on whether the trend is likely to continue or reverse. For example, if an asset’s price has been steadily increasing over a period, a trader may decide to make a “Call” trade, predicting that the trend will continue. Conversely, if the asset’s price has been decreasing, a trader may make a “Put” trade, predicting that the trend will continue.
News Trading
This strategy involves analyzing news and events that may impact the price of an asset and making trades based on how you think the market will react. For example, if a company releases positive earnings results, traders may make “Call” trades, predicting that the company’s stock price will rise. Conversely, if a company experiences negative news, traders may make “Put” trades, predicting that the company’s stock price will fall.
Straddle Strategy
This strategy which can be used for binary trading involves buying both call and put options on the same asset with the same expiry time. This way, traders can profit from both directions of the market movement, regardless of whether it goes up or down. However, this strategy requires high volatility in the market and a large price movement to be profitable.
Pinocchio Strategy
This strategy involves identifying false breakouts or reversals in the market and trading against them. For example, if the price breaks above a resistance level but then falls back below it, traders can buy put options on the assumption that it was a false breakout. Similarly, if the price breaks below a support level but then rises back above it, traders can buy call options on the assumption that it was a false reversal.
Fundamental Analysis
This strategy involves trading based on the intrinsic value of an asset rather than its price movements. The basis of this strategy is evaluating the financial statements and the prime ratios, etc., to conduct fundamental analysis. For example, if the trader believes that a company is undervalued or overvalued based on its earnings, growth, dividends, etc., he/she can buy a call or put options accordingly.
Hedging Strategy
This strategy involves reducing the risk by opening another trade that offsets the original trade. For example, if traders buy call options on an asset but then the market turns against the prediction, they can buy put options on the same asset with a lower strike price and a longer expiry time to limit their losses. This way, traders can hedge or protect their investments from unfavorable market conditions.
Momentum Strategy
This strategy can be effective in a market with strong momentum and involves trading based on the strength and speed of the market movement. If the price is moving rapidly in one direction with high volume, traders can buy call or put options depending on the direction of the momentum. Moreover, they can use technical indicators such as a stochastic oscillator or MACD to measure momentum for effective analysis and trading position.
Conclusion
Binary option trading is not new to the Indian markets but there is an air of uncertainty with respect to its legal status or the regulations surrounding it. It is a very risky form of trading and therefore is not widely encouraged in the Indian markets. In the normal course of trading, traders have the option for remedial actions as per SEBI provisions. However, in the case of binary options trading there is no such case.
FAQs
Binary option trading is considered to be illegal in India but still, traders across the country carry out such trading and the income from the same is liable to be taxed. Such income is considered to be speculative income and is taxed at 30%. Furthermore, this income is also subject to surcharge and cess as per the Income Tax Act 1961.
Since binary opinion trading is not legal in India, there is some level of ambiguity in its taxation as well. Like income from futures and opinions trading, many experts believe income from binary trading can also be treated as business income. However, the widely popular opinion is that it will be treated as speculative income. Therefore, it is better to consult a tax expert in this regard to arrive at a definite solution.
The essence of binary option trading is the definite outcome which will be in the form of a yes or no answer to the trading position and hence the name binary option trading.
Some of the pros or advantages of binary option trading include the simplicity of trading, the potential for higher returns, the flexibility of trading, and applicability to multiple assets.
Some of the shortcomings of binary options trading include high risk in trading, unregulated markets, limited knowledge and awareness, and use only for short-term focus on the portfolio
