Before we jump into binary options trading, it’s important to have an understanding of traditional options trading, what they are and how they work.
What Is Options Trading?
A traditional “options contract” allows investors to buy or sell an asset at a pre-set price point within a specific time period (also referred to as an options ‘expiration date.’) The investor who purchases the option contract is NOT required to sell or buy at that predetermined price point, but he has the option to choose to do so or not. It is the investor’s choice. Hence the word “options.”
You have two choices for trading options: Place a ‘Call‘ or a ‘Put.’
Placing a Call option means an investor is BUYING the asset at a specific price. This is often referred to as the ‘strike price.’ If you’re an investor and you believe the asset you’re analyzing will rise in value by the time the option expires, then you would purchase a Call option.
The opposite of a Call option is a Put option contract. Purchasing a Put option means the investor is selling an asset’s strike price because they believe the asset will fall in value by the time the option contract expires.
When an investor purchases an option contract, the strike price, or the price that you entered a call or put, is what is referred to as the “premium.” The premium in an options contract is the amount of money you are willing to risk, but it’s also the most that you can lose.
The amount of money an investor earns off an option trade is determined by subtracting the trade’s premium from the amount the asset’s price moved past your strike price in the direction you anticipated.
As an example, let’s say you want to purchase an option contract on an asset whose current strike price is $50,000. Based on your analysis, you believe the price of this asset will rise another $10,000 by six months from now. But obviously you don’t want to put up 50k, that’s too much risk.
Luckily, the asset’s $50,000 premium is only $2,500. You agree with the price, pay the contract holder $2,500 and wait to see if price moves in your favor. So six months go by and the asset’s price has risen to a value of around $60,000. You like the numbers and decide to purchase the asset at the agreed upon price point.
Now you pay the contract holder the initial strike price of $50,000 and own the contract yourself. Now you’re the one in the driver’s seat holding the contract. Your total profit from the option contract is $60,000 minus the strike price and the contract’s premium. So in this case: $60,000 – ($50,000 + $2,500) = $7,500 profit. Not bad.
On the opposite side of the trade, if it turns out your analysis was off and the asset’s price fell to $40,000 after 6 months, then you are not obligated to exercise the option contract and decide not to purchase the contract after all. Luckily, your total loss is only the premium you paid to the seller 6 months ago: $2,500.
By now it should be obvious that option trading is an excellent alternative to riskier forms of investment. Your risk is predetermined and limited. So now that you have the basics of options trading down, let’s take a look at the reason you’re here: binary options trading.
You finished learning about options trading, now let’s get into the real moneymaker.