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Published On: Wed, Feb 29th, 2012

Trading Stocks using Binary Options

Many investors prefer these days to trade stocks using binary options as opposed to doing so directly on the stock markets. This is because they can then utilize the advantages of binary options to boost their profitability. There are important variances between trading company shares directly and using binary options to do so. For example, in the former case you will own part of a firm after you purchase a percentage of its shock holding whereas in the latter you will just attained the ‘rights’ to buy or sell the shares of your selected company at a defined price.

You will have no property rights when you trade stocks using binary options. Essentially, shares are distributed by their holding company. In contrast, binary stock options are independently endorsed by Market Makers and are not associated with their parent companies directly. You can either initiate ‘CALL’ or ‘PUT’ binary options that have underlying assets based on company shares. A ‘CALL’ option enables you to purchase stocks while you can utilize a ‘PUT’ to sell them. The price of a stock option is known as a ‘premium’. There are many benefits that you can acquire by trading in binary stock options as opposed to trading stocks directly.

For example, you will just need to predict the direction in which the price of an underlying stock will progress and not the size of its movement when initiate binary options. This important attribute will simplify your trading decisions dramatically as well as substantially reducing the research you will need to undertake per trade. This is because the shares of companies can generate very involved price formations and patterns making them difficult to analyze and trade. Consequently, when you trade shares directly you need to study their historical performance and new developments in-depth whereas you will not have to undertake such complex tasks when initiating binary options.

You will have an exact understanding of your precise risk and profit potential even before you instigate your binary stock options. You will know that you will collect a pre-defined profit at expiration if you finish in-the-money which can be as high as 85% of your stake. Alternatively, you will also have a clear understanding of your risk exposure by knowing that you will receive a rebate between 10% and 15% of your wager if you are out-of-the-money at expiration.

In effect, you possess a built-in risk and money management strategy whenever you activate binary stocks options. This is a serious benefit compared to trading stocks directly when you will have to devise your own account protection in order to minimize your risk exposure.

You will profit by initiating ‘CALL’ binary options if the price of your selected stock completes just one point higher than its strike value at its expiration. In contrast, you require the price of your ‘PUT’ binary options to finish at least one point beneath its strike or opening price at expiration in order to collect a return. You can enhance your levels of returns even further when trading binary stock options if you devote your time to master trading strategies specifically designed to trade stocks, such as the following.

You can pair ‘call’ and ‘put’ binary options in order to produce a window of opportunity for increased profit whilst minimizing your risk exposure. For instance, consider that you have instigated a ‘CALL’ stock option with an opening price of $10 and you are now in-the-money by $14. However, you are worried that a price retraction could occur before expiration. How can you lock-in your profit?

One solution is that you could initiate and pair a ‘PUT’ stock option using the same company shares as its underlying asset. You would then generate a window of opportunity between $10 and $14 whereby if both options could close favorable at expiration, you would collect a double payout. You would also diminish your risk exposure in the process because if price finishes outside the window, then the profits of one option would almost neutralize the loss of the other. As you can deduce after studying this example, trading binary options using stocks as their underlying assets provides you with exciting profit prospects.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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