Options are a term quite often marshalled in the media and on the Internet, especially in a negative context. Black PR is spread by the market players who are not able to achieve large returns on the stock market. Mostly it happens when one relies on luck and not on knowledge when investing the money.
What are stock options
Stock options are a so-called financial derivatives. Derivatives are securities such as stocks or bonds, and their value depends on the underlying asset. The fluctuation of the option is then more and more dependent on external factors. In the case of securities, their value is determined by the market price, and the profit is calculated in the classic way: sale – purchase. In the case of stock options it is all about the unbalanced way of payment. The point here is that a transaction is made, subject of which is the underlying asset, but on the conditions arising from derivative’s parameters.
The options market was established as a response to the needs of investors associated with protecting themselves against the speculative risk. For a long time on the stock exchange there were instruments such as stock options or options on bonds. However, relatively recently the financial engineering specialists have noted the need for a new financial instrument – binary bonds exist in European exchange trade since 2012. Thanks to the phenomenon of leverage, which occurs in the case of derivatives, one can achieve much greater profit with much less involvement of own funds. That is why in the case of binary options one can achieve investment return even at the level of 80 percent.
The basic concepts of the stock market
Binary options, like any new instrument in the financial market, raises a lot of controversy. Ease of use and not a very complicated way of trading draws in amateurs. Often it is them who spoil the opinion, because they start playing the stock market without any strategy and treat it as a kind of gambling – once successful and other times not. The voices of doubters who undermine the possibility to profit are not surprising. Making money on the binary options is not simple. Before investing one needs to understand the market on which the profit is to be made. Each financial instrument has a different fluidity and volatility over time. Before entering the trading floor one should get acquainted with the basic terminology.
Keep in mind that the option’s value is not calculated in the classic way, it is the sum of the intrinsic value and time value. Intrinsic value is the amount which the market player would receive at the time of immediate execution, while the time value is the value that an option can reach until it expires. For this reason, there are three types of binary options: in the money (the exercise of an option is viable), at the money (exercise of an option brings neither profit nor loss) and out of the money (exercise of an option brings a loss).
Making money on the binary options
When trading binary options one can assume long and short positions. In a long position on the call options a bonus is received if the market price of the underlying asset reaches the projected maximum. The long position on the put option protects against falling prices in a given market. The bonus is paid when the instrument reaches the projected minimum. In the case of a short position on call options the market player obliges to sell their binary options at maturity of the underlying asset in exchange for a premium paid by the buyer. However, in the case of a short position on call options, the trader agrees to purchase at maturity of the underlying asset, at a fixed price in exchange for the premium.
As in the case of other financial instruments, also in the options market one needs to develop their own and effective strategy, the most popular are the strategy of a bull, a bear, a straddle and a butterfly. By choosing the bull, one puts out options in two positions at the same time, a long position on a call option with a lower strike price and a short position on a call option with a higher strike price. This allows earning by increasing the underlying asset while optimizing the losses in the case of a fall. The strategy of the bear is the opposite of the bull strategy and in it one places order on a long position on put option with a higher price of maturity and a short position on put option with a lower price of maturity. In this case, the money is made in the case of decrease of the underlying asset. In the strategy of the straddle it is assumed that the long positions on the call and put options are purchased simultaneously, with the same price and expiration. In this case the market player loses only when the underlying asset will be equal to the original price. The butterfly position uses all option positions: the long and short of both call and put options. The investor makes a profit when the financial instrument will be in a specific price range.
Before investing your savings on a binary options market it is worth to test your skills on demo accounts offered by brokerage platforms. At the beginning do not be discouraged by failures, because experienced market players believe that success equals the effectiveness of hits at the level of 60 percent.