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Binary Options Shorting

Written By

William Berg

Written By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

» William Berg Profile Page

Edited By

Tobias Robinson

Edited By

Tobias Robinson

Tobias is a partner at DayTrading.com, director of a UK limited company and active trader. He has over 25 years of experience in the financial industry and contributed via CySec to the regulatory response to digital options and CFD trading in Europe. Toby’s expertise and dedication to financial education make him a trusted voice in the industry, including a BBC investigation into digital options.

» Tobias Robinson Profile Page

Updated

Nov 28, 2024

Binary options shorting involves taking out a contract in the anticipation that the price of a particular asset will decrease. This guide to shorting binary options will cover how it works, the benefits and risks, getting started, plus the best supporting brokers.

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How Binary Options Shorting Works

Binary options are used by traders to make straightforward bets as to whether the price of an asset will increase or decrease. In a long position, you anticipate the price will rise to $100, whilst in a short binary options contract, you want the price to fall to $0. Binary options can be used to short stocks, forex, commodities, precious metals, and more.

Importantly, the price of a contract is always between $0 and $100. For example, will the price of Apple shares be above $170 (strike price) at 15:00 ET on 10 March (expiry)? Let’s say the price of the contract is currently $70. If the buyer is correct and the share price finishes above $170 at the expiry time, then they receive $100, meaning a profit of $30 ($100 – the initial $70 premium). If the price does not exceed $170, the buyer loses their investment, $70.

When shorting binary options, the reverse simply happens. The trader hopes the price of the asset will decrease. Positions can also be closed before the expiration time if the trader wants to protect their profits or limit their losses.

Pros of Binary Options Shorting

• Market access – binary options can be shorted in multiple markets, including popular stocks in tech and financial services, major currency pairs with the USD, cryptocurrencies like Bitcoin, plus precious metals such as gold and silver.
• Fixed reward & risk – Traders know how much they stand to make or lose before they take out a binary options contract. This makes it easier to manage risk for beginners.
• Easy to understand – With only two possible outcomes – win or lose, binary options shorting contracts are easy to get your head around. Investors simply need to decide whether the price of the asset will fall, and by how much.
• Short-term investing – Binary options can be shorted in as little as a minute at top brokers. This means traders can find multiple opportunities to generate profits throughout the trading day.

Risks of Binary Options Shorting

• Scams – Unfortunately, there are some untrustworthy binary options brokers running scams. Be wary of providers offering shorting contracts with exceptionally good returns and trading conditions. See our list of reliable brands to get started.
• Odds – Traders must ensure their wins outweigh their losses, also considering any brokerage fees. As a result, look for brands offering decent pay-outs on binary options shorting contracts.
• Regional restrictions – The FCA and the ESMA both ban the sale of binary options contracts by regulated firms to retail customers. Other countries like India do the same. Some traders will, therefore, find it difficult to trade binary options shorting contracts on reliable platforms.

Getting Started

Use our step-by-step guide to start binary options shorting:

1. Sign Up With a Broker

Many binary options trading platforms are available online. Unfortunately, there are also some scams and untrustworthy brokers. As a result, we recommend signing up with one of our top-rated brands.

It’s also worth considering the regulatory status of brokers. In the US, the trading of binary options is only allowed on regulated exchanges like Nadex. In much of the EU and UK, the sale and marketing of binary options to retail customers are banned. This means investors will need to open an account with an offshore provider.

2. Choose a Market

Binary options shorting can take place on most popular markets, from stocks and shares to currencies, cryptos and precious metals. But importantly, start with a market that you have a good knowledge of. It’s also worth utilising the various resources and insights available online to inform your decision making as to whether the price of a particular asset, such as Tesla stock, will decrease.

3. Select a Strike Price & Expiry

Some strike prices create a high-risk, high-reward scenario, while others offer smaller profits in return for less risk exposure. Ultimately, you need to consider your risk appetite and how much capital you wish to invest. Importantly, we recommend never risking more than you can afford to lose.

In terms of expiries, binary options contracts can range from just 60 seconds up to a day, a week, or even months. Short-term traders may believe the price of an asset will fall following a scheduled news announcement while longer-term investors may believe the price of an asset will decline over several months due to macroeconomic events and geopolitical uncertainty.

4. Monitor & Close

Traders can wait until the contract expires, in which case those binary options shorting will receive either the premium paid by the buyer (if successful) or must pay the entire reward (if unsuccessful).

Alternatively, if the price of a particular asset like gold is not falling as expected, you may be able to close out your position early to curtail your losses.

Bottom Line

Binary options shorting contracts are used to generate a profit when you believe the price of an asset will fall. You can short multiple markets with binary options, from stocks and shares to forex, commodities and cryptocurrencies. See our list of top trading brokers to get started today.

FAQs

How Does Binary Options Shorting Work?

Shorting with binary options involves taking out a contract where you turn a profit if the price of a particular asset, such as Bitcoin, falls. Brokers offer various payouts and contract options so compare a few brands before getting started.

What Markets Can You Short With Binary Options?

You can use binary options to short various financial markets, including currencies, equities, soft commodities, precious metals, plus cryptos. Of course, the range of assets varies between trading platforms so make sure the broker offers access to the markets that you’re interested in.

What Are The Risks Of Shorting With Binary Options?

Firstly, your prediction may be wrong which could cost you your initial capital. The binary options space is also susceptible to scams so be careful about signing up with an untrustworthy broker.

What Are The Best Brokers For Binary Options Shorting?

The top-rated binary options brokers in 2024 include Pocket Option and Quotex.

How Do I Start Shorting With Binary Options?

You will first need to open an account with a binary options broker. Next, find a market/asset that you believe may be about to experience a decline. Finally, check the payouts and trading conditions before taking out a contract.