Tuesday, 1 March 2016

BINARY OPTIONS EXPLAINED

A Binary Option is more like a wager with a bookie than an investment tool. Nevertheless, binaries are advertised as a method for traders/investors to make money from a correct prediction on the future price of a stock-market index, commodity, or currency pair.
The payoff is all or nothing, but the payoff is too small.
The typical bet with a bookmaker requires the bettor to risk $55 for the chance to win $50.
That represents a payoff of 91% ($50 ÷ $55).  The best payoff I could find for binary option trading platforms is 85% (for some trades), and other platforms offer much lower payoffs.
From my perspective, betting on a football game is similar to buying a binary option. If you want to wager that your favorite team will defeat (after adjusting the final score for the point spread) its main rival, you can buy a call option on your team.
·         It your team wins (after accounting for the point spread), the option is "in the money" and the bookie owes you $50.
·         It your team loses, the option is "out of the money" and you owe the bookie $55.?
BINARY OPTIONS ARE EUROPEAN STYLE AND THAT MEANS

·         They cannot be exercised before expiration arrives (i.e., until the game has ended). 
·         They are settled in cash.
That is all there is to a binary option. Pretty simple stuff.
However, some trading platforms (the online website where binary options are traded) accommodate traders who require simplicity and do not allow binary options to be sold. By offering a binary option on both the "over" (the stock price will be equal to, or above, the specified price at the cutoff time) and the "under" (the stock price will be below the specified price at the cutoff time), there is no need to sell binary options.
Binary Options -- compared with stock options -- are probably easier for some traders to understand. And that's not good for inexperienced traders who tend to trade first and ask questions later.
Trading platforms do not all use the same rules. It is essential to understand exactly what you are trading -- and that requires understanding the specific rules of the trading platform that you choose.
FOR EXAMPLE:
·         When trading binary options on the CBOE, the payout is always $100. The premium (cost of the binary option) varies between $1 and $99 per contract. When the stock market is open, these options can be traded. The bid/ask quote changes as market conditions change.
·         Some trading platforms protect a modest portion of your investment. For example, a wager of $100 may return $3 when the option is out of the money. Thus the true risk of buying this binary is only $97, and not $100.
·         When using an online trading platform, there are no market makers offering competitive bids and offers. There is only one price and you must take it or leave it.
For example, if the "payoff" is 73%, you win $73 when your prediction is correct and lose $100 when it is incorrect. Because these options are most often at the money at the time of the wager, these 50/50 propositions are very poor bets for the trader. The bookie pays 91% giving traders the possibility of making money. The 73% payoff is for suckers only.

No comments:

Post a Comment