Being an Option Trader: Which Steps You Should Take First
Binary option is a type of option where the trader opens or does not open a position at the financial asset price and the resulting profit is all or nothing.
This feature is the reason why binary options are rather easily understandable to trade than, say, traditional type of options.
Binary options are considered a contract settlement in European style, i.e. they may be exercised only on the expiration date. If at the expiration the options happen to be “in the money”, the option buyer or option seller receives a pre-specified amount of money. If they become “out of the money” options, the buyer or the seller does not receive anything. This is their simplicity in assessing the risk and profit. Comparing to traditional options, the full binary options profit payment is provided no matter how high (or low) the price has risen compared to the price of the option.
Despite the frequent saying “all or nothing”, “nothing” can actually mean “something”, as it usually happens, depending on the trading platform you use. This means that after the expiry an option owner can actually get a certain amount of payments, even if the option has expired “out of the money.”
So… What are your first steps here?
1: The two types of options should be examined
A trader who works with binary options has to be able to predict the expected direction of the underlying asset price movement. Most trading platforms have put and call options. A put option is predicting falling asset prices, while the call option is forecasting the asset price growth. In contrast to traditional options, a trader doesn’t need to know the motion magnitude. Instead, you must predict correctly whether the chosen asset price is above or below the exercise price. When the investor has his own point of view as for the underlying asset quality and wants to trade, he usually chooses binary options.
2: A decision as for its position should be made
Rate all the market conditions currently surrounding the asset you’ve chosen and spot whether the price is about to rise or fall. If your intuition is right as for the expiration date, you get the price of your contract. The yield on each successful trade is caused by the broker’s decision, and the size of the profit is always previously known.
3: Determination of the contract price should be learnt
The binary options contract price approximately equals to how the market accepts the probability of the event occurrence.
4: The advantages of binary options trading should be studied comparing to traditional trading
- Binary options are usually easier to sell because it is enough to forecast the underlying asset price movement direction, while in traditional options it is also necessary to predict the magnitude of movement beside predicting the price movement direction. Assets themselves are never bought or sold in fact, consequently, the sale of an asset and the stop-loss placement are not really the part of the process.
- The ratio of risk to reward always controls binary options. There is a risk and a profit, which a trader always knows in advance at the time of the contract purchase. Traditional options have no certain limits of risk and return, and therefore gains and losses can be unlimited.
- For binary options are available almost all trading and hedging strategies that can be applied either with traditional options. Fundamental and technical analysis can be used to improve the accuracy of price movement forecasting.
- In contrast to traditional options, the amount of profit here is not proportionate to the sum, by which the option is executed “in the money”. If the binary option ends “in the money”, even for one tick, the winner gets all the fixed profit.
- Binary options propose traders short-term contracts. In some markets, binary options contracts complete a few times during the trading day, while in the others they can last up to a year. There are brokers offering contracts lasting only for thirty seconds. This gives the trader more flexibility and investment opportunities, as markets change over time.
The main wisdom lies here:
- Before you open every position, you always analyze the market. It is necessary to consider many factors making a decision as to whether the asset price rises or falls in a certain period. Remember that the risk of losing money increases substantially without detailed analysis.
- You need to learn the interpretation of the option price. The price at which trading happens is the indicator of chance as to whether the contract is executed “in the money” or “out of the money.”
- Before making a final choice, perform a careful selection of a few brokers. Every broker provides their own trading platform, the individual contract duration, the rate of return, assets and necessary training materials. Each of these factors might influence the overall profit potential.
- Learn the interrelation between risk and profit – in trading binary options risk and reward go hand in hand. The less likelihood that the option will be executed “in the money”, the greater the profits associated with it. A smart investor is clear about these two components and evaluates each contract for them before opening a position on the contract.
What else? Well…
A trader should know the best time to exit the position. Intuitive traders always act fast feeling that their binary options contract is to close “out of the money” after the expiration.
Have the information about your underlying assets. The underlying asset derives the financial binary option. Make sure you own the full information about the underlying asset and the corresponding financial markets, especially the market, in which the asset is traded, before making investment in binary options.
There are also a few warnings I would like to give you right away:
- Trading binary options, it is better to avoid “bonuses”, because in this case, the broker can block your money until you get the profit in the amount of certain lots of the deposit + bonus.
- Keep in mind that this kind of trade has a financial risk. There is no 100% guarantee that even in this kind of trade you will earn any particular amount of money.
Good luck to everyone who reads this!
That’s all for now. Got any questions? Just ask the expert!