Trading Indices using Binary Options

Posted By Marcus Holland On Sunday, February 7th, 2010 With 0 Comments

In recent times, index trading has enjoyed a surge in popularity because of its many advantageous features. For instance, they offer an exciting business opportunity as your profits will not attract any taxation liabilities unlike other popular investment types. In addition, your broker’s powerful trading platform will enable you to speculate on indices anywhere in the world and at any time. You can also seek profits irrespective of whether the market trend is currently bearish or bullish.

 So, what is index trading all about? An index comprises a group of companies that have been selected to satisfy specific criteria. For example, the DOW Jones Industrial Average displays the performance of the top 30 largest US companies based in the United States that are publically owned. The S&P500 is formed using the stocks of the top 500 biggest business organizations in the world. Each index monitors the trading activities of its composite members by deploying numerous different tools and methodologies.

Many investors favor index trading because it allows them to speculate on the broader impacts of the markets by expending less decision-making and implementing fewer trading actions. As such, they can exploit features, such as high volatility, without the need to undertake extensive research into all the member firms of an index. Instigating informed and quality decisions is therefore a simpler process than attempting to trade individual companies directly on the stock markets. You can also assess the on-going performance of your indices by tracking the price feeds supplied by famous firms, such as Reuters.

In addition, you can trade indices twenty-four hours a day. As such, you can implement well-proven techniques such as predicting the early responses of indices to events that have occurred overnight at the opening of the New York exchange at 9.30am EST. You can achieve this objective by attaining insights into how the Asian and European markets performed overnight and what were the chief drivers instigating these actions.

To perform this activity proficiently, you will need to know when the major global stock markets are active. For instance, trading commences every day with the Nikkei opening in Japan followed by the Hong Kong exchange, then the European markets and finally the US ones. Consequently, by deducing the primary drivers behind the price movements that drove the Asian and European markets, you will then be able to better to forecast how the S%P 500 will respond when the New York Exchange opens later during the day.

Subsequently, by trading indices you gain the opportunity to speculate on a larger segment of the stock markets by performing just one overall analysis and executing one trade. This is a far easier option than attempting to trade stocks directly whereby you will need to research each parent company individually and activate single trades for each one.  This means that perhaps the biggest advantage of trading indices is that a significantly diminished amount of detailed research is required to do so successfully.

Introducing the powerful benefits possessed by binary options to trade indices simplifies the process to such a degree that this alternative as grown substantially in popularity with traders recently. This is because you will now be able to record a win if the value of an index finishes at expiration just one point in your favored direction above its opening price. You also do not need to focus on determining the size of price actions just their directions.

A favorite strategy that has been deployed successfully by many investors to trade indices utilizing binary options entails hedging an option based on the shares of a chosen firm against another whose underlying asset is the index that includes that company. For instance, envisage that you elect to instigate a ‘CALL’ binary option using Microsoft as its supporting asset because you have deduced that its shares will rise in the short term. In order to hedge this wager and if you have also ascertained that the stock markets will generally decline in value, then you could instigating a ‘PUT’ binary option based on the S&P 500 of which Microsoft is a member company.

Consequently, such a strategy will permit you to endorse your trust and faith in your decision to back your selected company. In addition, you would provide yourself with the opportunity to optimize your returns by reducing your risks. For instance, in the example just described you would collect a double payout if Microsoft appreciates in value and the S&P 500 falls in value by expiration.

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