Posts tagged binary options trading
Binary Options
0Many of you will be familiar with vanilla options. They are the regular options offered by most online binary options trading platforms and they are even offered by some companies as a form of employee incentive. Binary options however are less well known about however their use is increasing in the trading market. What are the differences between these two types of options trading?
Vanilla options: they have two types of expiry times – monthly or quarterly
Binary options: they have more varied and immediate expiries of end of the hour, day, week or month
Vanilla options: the payout received will depend on the difference in the price change between the price of the asset at purchase and its current price
Binary options: the payout if fixed when the option is bought
Vanilla options: this type of option can be executed at any time up to time of expiry
Binary options: these options cannot be executed before their expiry time
Vanilla options: to be in the money their price must have risen by a certain amount
Binary options: they need only move a small amount in the right direction to be in the money
These differences necessitate a different approach when trading binary options. In some respects an investor is more flexible. He can choose from a wider variety of expiry times making options trading more flexible and personal and making the results more immediate. Any risk is also reduced since he knows from the onset what his potential reward or loss will be since the payout is known from the start. For example, if he purchases a $100 Gold binary option with a 70% payout, then at the expiry time he will either receive a $170 payout if his option expires in the money or nothing or a % refund if it expires out of the money (depending on the platform, this may be as much as 15%). What is important is that he will never have to pay more money than his original binary options price – in this case $100.
Since a binary option cannot be exercised before the expiry time, it means that his purchase is final as there is no get out option before the expiry time. However, to be in the money his binary option need only move by a small amount, in either direction (depending on if a Call or Put option was bought), meaning a positive result is easier to achieve. This also means that an investor can more easily invest a smaller amount of money and make a larger profit than vanilla option trading can generate.
Trade Binary Options
0The structure of trading binary options has led to its growth in popularity over the past year. Together with the simplicity of the online binary options trading platforms and the benefits that binary options provide over traditional options, the explosion in this industry comes as no surprise.
Firstly, understanding how to trade binary options is vital before you begin trading. Below I will describe how a typical binary option trade would work:
Step 1: decide which asset you would like to purchase. Choose whether to purchase stock options, commodity options, forex options or index options.
Step 2: select your expiry time which may be the end of the nearest hour, day, week or month
Step 3: choose whether you think the asset’s price will go above or below the current price. This price is constantly moving with the market so it advised to analyze the price using the tools available on the website (if available)
Step 4: purchase your binary option for the desired amount and wait for the expiry time to show the asset’s price
Trading binary options has two possible directions – above or below, known in the industry as Call or Put.
A Call binary option is bought when an investor thinks that the price of his asset will rise above its current price.
A Put binary option is bought when an investor thinks that the price of his asset will decrease below its current price.
Depending on which binary option trade he bought will depend on whether it expires in the money (successful) or out of the money (unsuccessful).
In the money – this is when the option expires above the bought price in a Call binary option or below it in a Put binary option.
Out of the money – this is when the option expires below the bought price in a Call binary option or above it in a Put binary option.
The payback received when trading binary options will depend on the price stated at the time of purchase. This is different on each online trading platform and varies between each underlying asset and expiry time, however it is normally between 60-70% for in the money binary options. Some platforms offer a refund for those options which expire out of the money. These differ from 5-15% refunds, again depending on the online trading platform.
So, the steps involved in trading binary options are relatively simple. Once an investor has done his research, he can carry out the trade from his own computer, without the need for an intermediary and he can trade his binary options in an instant.
Stock Options Trading
0Stock binary options trading is when an investor enters into a contract to buy stocks at a fixed price at a set time in the future. The structure of binary options trading has great benefits which make it a perfect investment tool for those who lack spare millions of dollars in their back pockets.
Here’s why:
In traditional stock trading, the actual stock itself is bought whereas in stock binary options trading, only the contract is bought. The benefits of this are huge. Buying stock can often be extremely expensive and out of the reach of the regular investor who does not have the funds to purchase the actual stock. However, when trading binary stock options, the investor is benefiting from the performance of the stock and so is not limited by the current share price. This widens the circle of investors who can participate in stock trading.
Here’s an example:
Apple stocks are trading at say $250 a share. You have $500 to invest. After a week the share price rises to $260 a share.
Situation 1 – Stock trading – you initially buy 2 shares at $250 a share and sell them a week later for $260 a share, making $20 profit (4% profit).
Situation 2 – Stock binary option trading – when the share price is $250 you buy a Call binary option for $500 with a 70% payout rate, with a week expiry. When the option expires in a week you are in the money since the share price has risen (it is not relevant by how much). You make $850 which is a $350 profit (70%).
In both situations, knowledge of the stock in question is necessary, yet with stock option trading a much larger profit can be gained from the same investment amount. In the stock trading example, a 10 point change is considered a significant increase in share price however with only a $500 investment the profit was minimal. Yet from the same investment in a stock binary option, the price change resulted in a huge profit, and it would have yielded the same result had the price risen 1 point or 100 points.
Additionally, what is important to note is that the payout in stock option trading is known at the time of purchase. This means that the investor knows the risks involved in his purchase. Whereas in traditional stock trading, if a stock suddenly plummets in price, an investor may lose heavily and be unable to control or prepare for this loss.
The same logic applies to the binary options trading of other types of assets. Commodity options, index options and forex options all work in the same way and their make-up allows investors to delve into the world of trading with less funds, yet still wield high profits.
Forex options trading
0What is forex trading?
Forex trading is when a person or institution buys and sells actual currencies, depending on the rate of the quote currency relative to the base currency (see below).
What is forex?
When you go on holiday and buy the local currency, you will probably spend your time converting the currency in your head back into your home currency so that you can decide whether you are getting a ‘good deal’ or not. This is the exchange rate or forex rate – an acronym for Forex Exchange. This rate will affect your ‘good deal’ outcome.
What is forex option trading?
Forex options trading is when an investor enters into a contract to buy or sell the currency at a fixed price at a set time in the future. They are not buying the currencies themselves but rather they are buying a contract which is affected by the currencies’ performance. A forex options trading investor can easily become a successful trader by gaining knowledge of different currencies and their likely movements relative to one another.
How is it represented?
Forex is represented in pairs e.g. USD/EUR, GBP/JPY. The first currency is known as the ‘base’ currency and has a value of 1. The second currency is known as the ‘quote’ currency. Its value shows how much of the quote currency is needed to buy one unit of the base currency.
Here’s an example: you are from Italy and holidaying in the USA so your currency pair is USD/EUR = 1.42958 which means that it costs 1.42958 Euros to buy 1 US dollar. If the USD strengthens then the number 1.42958 will increase, so you will need more Euros to buy one USD. Similarly, if the USD weakens then the number 1.42958 will decrease and it will take less Euros to buy one USD.
What does this mean for me?
In the example of your holiday, if you were in the USA and the USD weakened then you would benefit by receiving more dollars for your Euros.
How can I profit from forex?
To profit from forex you can purchase a forex binary option. You can monitor a currency pair and purchase a forex binary option based on which currency you think will grow stronger. If you think the quote currency will go stronger then you can purchase a Call forex binary option. If at the expiry time, your quote currency has indeed risen then your option will be in the money. You will then receive the payout offered on the online trading platform. If you think the quote currency will be weaker then you can purchase a Put forex binary option. If at the expiry time, your quote currency has indeed fallen then your option will again be in the money.
