An option - what it is, their types and uses. Binary options
Today you can often hear about such an instrument of trade as an option. What it is? Options are type. They are derived because their price is inextricably linked to the cost of something else. In particular, options are contracts that provide the right, but not the obligation to buy or sell the underlying asset at a set price before a certain date. The right to buy is called a buy option, and the right to sell is a put option.
Difference from other options
People familiar with derivatives may not notice the obvious difference between this definition and what a futures or forward contract does. It is necessary to understand the difference between such a contract and an option. What it is? The answer is that futures or forwards give the right and obligation to buy or sell at some point in the future. For example, a short cattle futures contract is required to deliver physical cows to the buyer if it does not close its positions before the expiration date.An option contract does not have the same obligation, and that is why it is called a derivative.
Option investment: what is it?
A buy option can be considered a deposit for a future purpose. For example, a land developer may want to be eligible to purchase an empty lot in the future, but will want to exercise this right if some zoning laws are introduced. He can buy a call option from a landowner to purchase a lot for $ 250,000 at any time in the next 3 years. Of course, the landowner will not provide this option for free, the developer must make an advance payment to get this right. As for options, this value is called a premium and is the price of the contract. In this example, its size may be $ 6,000, which the developer pays the landowner. For example, two years pass, and the zoning has been approved. The developer implements his version and buys land for $ 250,000, although the market value of this site has doubled. In the alternative scenario, zoning approval does not occur for 4 years, until this option expires.Now the developer must pay the market price. In any case, the landowner holds $ 6,000. These are the guarantees offered by the option.
What is it when it comes to selling? On the other hand, a put option can be considered as an insurance policy. For example, a land developer owns a large portfolio of blue chip stocks and is concerned that a decline may occur in the next two years. He wants to be sure that if a bearish trend appears, his portfolio will not lose more than 10% of its value. If 500 pips are currently trading at 2500, he can buy a put option, which gives him the right to sell the index at 2250 at any time during the next two years. If after six months the market falls by 20%, it has the opportunity to sell 250 points at the index of 2250, the rest will be 2,000 in a year, and the total loss will be only 10%. In fact, even if the market drops to zero, it will still lose only 10%, given its put option. Again, the purchase of an option will cost a certain value (premium), and if the market does not fall during this period, it will be lost.
What is the situation in practice?
Options trading is one of the popular trends in today's financial markets. Both experienced traders and beginners rush to add them to their own investment portfolios. Like other trading platforms or businesses, you need to have your own strategy to earn money consistently.
If you do this without a strategy or tactic that will help you trade, you can also consider yourself a gambler. Relying on luck is not at all safe with such trading, because in the end it will not work for you and may lead to the loss of all your investments. You will need a solid method that you can apply each time, and which will help you make the right predictions. In addition, you need to use a strategy in which you are well versed and which will successfully increase your chances of being in profit.
Bet or trade?
Strategies can usually be classified into two groups. These categories are:
- Betting strategies based on rates - means that the investor uses only rates, regardless of whether he is familiar with financial markets or not.Such strategies use several tactics aimed at increasing the probability of winning. Based on data from the news, they are the most visible example in this group.
- Strategies for market behavior - here the investor relies almost entirely on technical and statistical data that is available on its own or obtained as a result of research. Such strategies may be more difficult to understand and apply, but they are also the most reliable, since they are objective. There are techniques and signals for binary options, designed to make it easier for you to understand some of the data.
Fundamental Analysis Strategy
This method of trading is associated with an analysis of the overall performance or attributes of a particular company. As an investor or trader in binary options, you are interested in knowing about the state of balance, profits and expenses, and always about the movement of material resources of the company, before you buy binary options. Other factors that cannot be verified without verification include complaints from employees and business partners.In simple terms, this strategy analyzes the general picture of the interested business in which you want to invest your shares and, at times, in the overall industry.
Technical Analysis Strategy
This type of trading is very popular in options trading. Its implementation is mainly related to the study of the past using various parameters, such as graphs and charts. They are used to predict the future value of an asset. This method is not related to obtaining the intrinsic value of the asset. This strategy is very useful in options trading, because, as a trader, you do not need to delve into the financial statements of the company. From the number of instruments used in technical analysis, various signals for binary options and indicators can be noted (the Bollinger bands and the moving average are most common).
Major Options Strategy
This strategy is quite popular among options traders. It is designed and used to protect itself from incurring full losses on its investments. You make a choice of the currency or underlying asset in which you are interested, and then,if the exercise price moves in the right direction, you will place the call option. At the same time, you put a put option on the same asset. Such tactics are offered by many binary options brokers.
You can use the following example.
The currency option GBP / USD goes to 1: 4000. You set the call option to $ 100, which expires after 30 minutes. The payout will be 70% and 15% if you lose. In the first quarter of an hour, the asset is at 1: 4015, which is good for you. At this particular time, you buy a put option on the same asset at a price of 1: 4015, ending in 15 minutes at a price of $ 100. Payments are the same as call options.
After 30 minutes there will be two results. Your 30 minute winnings and 15 minute option wins. You will receive $ 185 of 70% of the winnings for the call and 15% of the comforting reimbursement of the put option.
All binary options (whether call or put) mean money. You will have $ 340 ($ 170 + $ 170). Since it is almost impossible to lose both options, the total risk of loss in such a trade is only $ 15.
Algorithmic and signal assistants
There are applications offered by developers that are very convenient when trading or analyzing market data.Perhaps you should invest in such an assistant. This application installs on your computer and searches for data that you should study, and then analyzes to find the best results. Often, such programs are offered by experienced binary options brokers. These platforms are useful in that they use data from both technical and fundamental analysis at the same time. Then the computer will choose a deal for you that allows you to trade profitably.
You could even go ahead and develop your own application that will trade for you. However, you will need to update the source data regularly, the program selects its analytical data from them. To go this way, you must have extensive experience and have a good idea how to make money on options.
Cointegration Trading Strategy
There may be two stocks with a high correlation dependence on the market. This may be due to the fact that they are in the same industry and are traded on the same market, which affects many factors in the same way. Given the high level of correlation between the specified pair of stocks, you will notice that every timewhen there is a gap between them, it will soon close. A rupture may be caused by the weakening of one stock temporarily. The main task here is to define it.
After determining the gap, you need to buy a call option for weak stocks or a put for an asset if the share price is higher. Ultimately, both assets will come to a correlation path, and this should be the “exit point”.
Binary Options Rating
Strategies, like investment options, are numerous, and you can get one that will give you a steady win. If you are a new trader, research well and identify one strategy that best suits your trading portfolio and pattern. If you are a little more experienced, you can develop your personal strategy or combine the two already existing ones to create a hybrid. In any case, an experienced broker will help you, which will allow you not to lose your investments and significantly increase your profit. The rating of binary options (more precisely, the companies that are engaged in such trading) currently looks as follows:
- Olymp Trade is the undisputed leader not only in Russia, but also in the international market.Known for its bonus system for beginners and unlimited demo account, allowing you to undergo quality training.
- Binomo - despite the fact that the company has been working with binary options since 2014 only, its reputation is impeccable. It offers unique trading conditions that are absent from other brokers.
- Utrader - a trading platform created specifically for Russian-speaking traders, most suitable for transactions with short-term options. Designed for options with a minimum deposit of less than $ 10.
- Finmax is a relatively young broker who has rapidly taken the top lines of the ratings. Of the distinctive features, there are several levels of accounts that require a different deposit size. The higher the level, the more investments are required and, accordingly, more bonuses and privileges.
- "Binarium" - the trading platform is designed for long-term transactions. Of the essential features, we can distinguish a good risk insurance system.