Binary Options Trading – Four Simple Steps to Success

April 30, 2010 · Posted in options trading · Comment 

Binary options are fixed return options because they come with only 2 possible outcomes. It is a contract which gives the buyer a right to buy an underlying asset at a predecided fixed price within a specified time limit. The security that is being traded is known as the underlying asset and can include commodities (e.g. gold, silver, nickel, lead, and oil), currencies (USD/JPY), stocks (e.g. Apple, Microsoft, IBM) or stock indices. The price at which owner buys or sells is known as the strike price.

When trading binary options the person who is buying the underlying asset chooses call option if he is expecting a rise in the value of the security at the end of the expiry of time which may be the end of the day, week or the month. The buyer will place a call option thinking that the option price would be more than the current price at the time of trade. In vice versa the owner will place a put option if he thinks that the option price will be less than the current price. Binary option trade is the most flexible type of trade available. The trader can select the asset, predicted direction, expiry time and it can all be controlled by the owner of the security. The only thing that remains unknown is whether the asset will expire lesser or higher than the current price.

There are significant differences between binary option trading and an ordinary trading. Under ordinary trading you actually own the asset and can possess it for any time you desire. Under option trading, you are actually trading on the variances of the asset. For example, when you do option trade in Microsoft, you are actually not owning the shares of the company but making a contract whether the price of Microsoft’s shares are to go up or down at the end of the expiry period. The correctness to which one can make the prediction after studying the price movement of the security can help in making profit or losses for the trader.

Binary options’ trading is a common tool used by traders nowadays. Most day traders now adopt binary options trading so as to increase the profits that they earn from these trades. Simply, binary options’ trading is a contract which upon the attainment of a specified condition gives a predetermined fixed amount to the trader. The amount to be paid depends on whether his contract ends “in the money” or ends “out of money”. In the case were a contract ends “out of money” the trader will not receive anything at the time of expiry.

Are you interested in doubling your profits without investing more? Trade binary option is the tool that you can apply to secure maximum profits. If you are able to predict the price movements of the security of a company for a particular time period, then surely option trading is the area where you can surely succeed. Binary options trading do carry with it a high risk. But is there any trading instrument which is completely risk free? If you are able to bear the risk that is associated with options trading, the returns that you would be getting will be much more than the returns that any other trading instrument will give you.

How can we make use of the binary options to make money?

1. Trade on the most active and liquid securities: A trader should always do trade on those companies which are very active on the indices and do larger volumes of trade each day. These will be highly capitalized growth oriented companies and you can always expect their prices to go up.

2. Do the opposite if the market has risen already: In a day if you have missed out on a market rally caused by a sector a particular company, then don’t feel sad. You could trade for the opposite as the prices are to settle at the end of the day.

3. Give importance for quantity than quality: The most important thing that you should consider while engaging in binary trading options is that you should consider quantity over quality of the securities. Binary options trading will offer you more return when you go for quantity of shares than to its quality. The traders need not worry about the magnitude but consider only direction of the security price.

4. Binary options trading can be used for hedging: The simplest way to make money from binary option trading is to hedge your contract. If you find before the expiry time, that the price movement is in your favour, you can hedge the contract and lock in the already made profits. To conclude, we can definitely say that binary options trading is one of the most powerful trading instrument available with us which can help in maximizing returns to the traders.

Author: Roy Obrian
Article Source: EzineArticles.com
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The Psychological Component to Options Trading

April 23, 2010 · Posted in options trading · Comment 

Succeeding with options is not always the easiest thing to achieve. Sure, there are some that have made a great success in their ventures into the world of options trading. These people are among those that many will look towards as inspiration for their options trading adventures. Then, there will be those that will look towards these success stories for more than inspiration. They will look towards successful options traders as those to duplicate. Or, more accurately, they will try to duplicate the trading methods and strategies of the trader.

While it is certainly a wise thing to look towards the trading methods of a successful trader, duplicating the steps of the trader alone may not prove to be the best strategy. The reason for this is that there are other factors that go into the process of developing a trading strategy than just the execution of the trades. Personal factors will go into the development of a methodology. In some instances, there will be psychological factors that will be developed into the trading plans. Understanding such components is vital to exploring a trading method to make sure it is valuable to your goals.

Actually, it would not hurt to explore your own psychological factors and facets prior to looking seriously at trading. Now, some may assume such assessments are little more than ‘psycho-babble’ that seek to examine options trading from an over-analytical perspective. This may be the case in some instances but as a general explanation of what motivates people towards options trading, it is definitely not something you want to overlook. By having a clear understanding of your own psychological makeup, you can develop the proper insight into how to be effective in the art of trading.

Simply put, some people are more cut out for options trading than others. Those that are conservative in their investment strategies might wish to limit options trading to a smaller part of their overall portfolio. Those that can be considered quite aggressive in their approach may look towards possibly using options as a hedge to their portfolio. Again, your own personal psychological makeup regarding comfort levels of trading in essential in options. This will certainly help promote your ability to discover the proper answer to whether or not you are cut out for options trading.

How can you discover whether or not you have the mindset of an options trader? The first step involves honestly answering whether or not you are someone that possesses the discipline to be an options trader. Some may believe they have the discipline to succeed. However, believing you possess certain attributes to a specific degree and actually possessing those attributes to the proper degree are two completely different things. Knowing exactly where you stand in terms of your mindset and your levels of discipline will aid in boosting your chances of success. For example, someone who needs to keep fiddling with their account by buying and selling every few days isn’t someone who should be investing in options! The commissions alone will eat you up. Similarly someone who like a lot of excitement in their trading should probably stay away from options.

Having a quality options trading strategy is helpful. Putting the options trading strategy through to fruition is even more helpful. But, once again, there is a big difference in having the desire to follow such a process and actually following through with it. Those that are able to follow through with such steps may be limited in number. No, that is not said as a means of undermining anyone’s motivation, morale, or desire. Rather, it is meant as a way of properly forecasting the management of your venture and assessing the risk of getting involved with options trading. You also need a plan for when the market goes against your strategy, so that you don’t make decisions because you’re panicking.

Yes, trading in options needs to be looked from the perspective of managing a small business. When operating a small business, you need to assess the risk associated with a venture. You also need to assess the risks and potentials associated with the success or failure of the business. This same ideology needs to be put towards options trading. If you can honestly assess yourself as someone with the self discipline to follow through with a reliable options trading strategy, then you may very well be extremely successful with options trading.

Also, how well can you handle losing trades? Are you able to handle losses and pick things up and start the process over again? If you are then you may very well embody the proper psychological makeup for succeeding with options trading. Those that cannot handle the pressure of the occasional loss would be better served looking towards another investing strategy.

It has been said success starts with the right mental makeup. If you can adapt your mindset to your psychological approach to trading, you may find success is not as elusive as you think.

Author: Paul W Watson
Article Source: EzineArticles.com
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Your Guide to Binary Options and Binary Option Trading

April 16, 2010 · Posted in options trading · Comment 

A binary option is a fixed return option because there are only 2 possible outcomes which are fully realized at the onset of the contract

A binary option is a contract which gives the buyer (known as the owner) the right, but not the obligation, to buy an underlying asset at a fixed price within a specified time frame.

The items being traded are known as underlying assets and they could be a range of products: currencies (e.g. USD/JPY), commodities (e.g. Oil, Gold), stocks (e.g. Microsoft, Coca Cola) or indices (e.g. Nasdaq, FTSE 100). The fixed price at which the owner buys or sells at, is known as the strike price.

When trading binary options, the buyer of the option chooses whether he thinks the underlying asset will hit the strike price by the selected expiry time – this could be at the end of the nearest hour or the end of the day, week or month.

The owner places a call option on his binary option trade if he thinks that at the expiry time the option will be higher than the current price. He places a put option if he thinks that at the expiry time the option will be lower than the current price.

In this respect binary option trading is extremely flexible. The asset, expiry time and predicted asset direction can be controlled by the owner of the investment who can select each one as he desires. The only unknown factor is if the asset will expire higher or lower that its existing price.

The returns from binary option trades are set from the onset of the contract. If an option expires in-the-money then a buyer will receive between 65-71% profit on the investment amount. If an option expires out-of-the-money then with anyoption(TM), the buyer will receive a 15% payback on his initial investment. The certainty of binary option trading makes it a preferred method of trading for many investors since not only is the potential gain known from the offset, but more importantly the potential loss is fixed and they will not be called upon for cover an investment which ended out-of-the-money.

This is how trading binary options would work: Investor A invests $100 on a call option on Oil, with a 70% return rate, with an end of the day expiry time. The current rate of Oil is 65.9001. If at the end of the day the price of oil closes at 65.9002 or above, then Investor A will receive $170. If it closes at 65.9000 or below, then he will receive a $15 payback. The simplicity of binary option trading makes it an attractive and desired way of investing for many investors.

The difference with trading binary options to traditional trading is that in binary option trading, a buyer is just trading on the performance of an asset – they will not actually own the asset itself. For example, in a stock option trade in Microsoft, an investor is not literally buying Microsoft shares, but rather opening a contract on whether the shares of Microsoft will increase or decrease within a specified time period.

Due their uniqueness, binary options have several advantages.

They are easier to trade because only a sense of which direction the asset will move in is needed

There is a controlled risk which is known from the onset of the contract – the 2 possible outcomes are pre-determined and set by the buyer depending on how much he invests in the option

For a binary option trade to be profitable, the option must only move in the predicted direction – the magnitude of the move is not relevant hence it is easier to receive a payout

Binary option trading is extremely flexible, due to multiple expiry dates and times, the range of underlying assets on offer and the ability to trade online without the need for a broker

So, whether you are a investor new to the world of trading options or a old-time trader used to the traditional trading market, it is recommended to try your hand at the phenomenon that is binary option trading and see how it could work for you.

Author: Eugene Jameson
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Some Terms Used in Online Options Trading

April 15, 2010 · Posted in options trading · Comment 

Trading stock options differs in some important ways from simply trading stocks. Usually trading stocks involves the basic strategy of buying low and selling high – in an attempt to capitalize on the upward movement of the stock price. Once you own a stock it is yours until you sell it. And generally speaking, the amount of risk you are prepared to take is reflected in the types of stock you buy and how you spread your portfolio over a range of stocks.

Trading stock options, on the other hand, is quite different, and it is important to know some basic concepts and standard terminology before getting involved. Otherwise you will probably do things you will regret, and may leave yourself open to significant risks.

The first thing you must understand about options trading is that purchasing a stock option is not the same as purchasing the underlying stock. When you purchase a stock option you are essentially purchasing a contract that allows you to do something with a specific block of stock – usually either buy it or sell it at a specific price.

Here are some of the terms regularly used by stock option traders. Understanding these terms should help you on your way to understanding how options trading works.

Whenever you buy one of the options discussed below you have to pay a relatively small “premium”, very much like an insurance premium. The amount of the premium is established by the market and is based on a very complex mix of factors.

A “Call” option is one of the two basic types of options you can purchase. A call option gives you the right (but not the obligation) to buy a block of stocks – usually in increments of 100 shares – at a pre-determined price before a pre-determined date.

For example, say you purchase a call option for 100 shares of ABC stock at $50 with an expiry date of May 31. This means if the price of ABC goes to $65 during that time period you can purchase it at only $50 – thus realizing a significant profit. “Wow”, most rookies will say, “That sounds like an awfully easy way to make money!” Would that it were that simple.

A “Put” option is the other of the two basic types of options. A put option gives you the right (but not the obligation) to sell a block of stocks at a pre-determined price before a pre-determined date. As with a call option, you are free to exercise the option up to the expiry date, but you are not obligated to do so. You can just let it expire in which case you simply lose your premium.

Put options are often used as a way to minimize risk. For example if you own 100 shares of XYZ stock at a current market value of $60 and you suspect it may go down in the next month or two, you could buy a put option giving you the option of selling it at, say, $50. That way if it should drop to, say, $40, you could still sell it for $50, thus reducing your loss. Of course it is not usually quite that simple, but that’s the general idea.

The “strike price” is the agreed upon price which will be paid when the option is exercised. In both of our examples, the strike price is $50 per share.

As an options trader you can either buy or sell either call or put options. For example, if you sell (or “write”) a call option for ABC at $50 with an expiry of May 31, you are then obligated to sell that stock to a trader who exercises the corresponding call option.

A “Covered Call” is a call option which you have written when you actually own the underlying stock. In our example, if you wrote a call for 100 shares of ABC at $50 with an expiry of May 31, that option would be “covered” if you actually owned the shares before the option was assigned to you.

Trading covered calls is normally considered a fairly low risk strategy. That is because when you wrote the option you would have already received a premium for selling it, so you are ahead right from the beginning.

Also in this case if the value of the stock starts to go up dramatically you can either sell the option itself (if you can find a buyer), or wait for the option to be exercised and then sell the stock. You will still be ahead, but just not as much as if you had been able to hold onto the stock yourself.

On the other hand, trading uncovered calls carries considerably more risk. In that scenario if the agreed upon price is $50 and the market price is $65, and you don’t actually own the stock you will have to go out and buy it at $65 so you can sell it for $50. That obviously will result in a real loss.

The term “In The Money” refers to the relationship between the strike price and the current market price. In the previous example if the current market price was only $45 when the option was purchased for a strike price of $50 that option would be “not in the money” or “out of the money” from the perspective of the purchaser of the call option.

Why would someone purchase an option that was “out of the money”? Usually because the trader thinks he or she has good reason to believe that the underlying stock price will go up beyond the strike price. This type of purchase is fairly common with beginners because it is very similar to a typical stock trade where you “buy low and (hope to) sell high”.

Options like this are also fairly cheap to purchase because they so seldom work out the way you think they are going to. Their low cost is another reason inexperienced traders like them.

These examples give you an idea of the different ways you can trade stock options. They also illustrate how with options trading it is very important to know what you are doing. Finding a good online trading website is probably the most important step in learning what you should and what you should not do.

There is also a significant difference between different online trading sites in the fees charged for trades, broker assisted trades, and other services they provide. So it definitely pays to shop around and find the online trading site that offers the best service at the lowest price.

Author: N. Messe
Article Source: EzineArticles.com
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Want to Learn Options Trading? Discover 3 Essential Parts of Any Option Trading Education Package

April 12, 2010 · Posted in options trading · Comment 

Option trading education can be challenging and difficult to understand due to all the jargon and technical words. If you are interested and want to learn option trading you will need to ensure you have an open mind. There are many stories of how people have lost fortunes in the options market. There is no doubt there is some risk in options trading – but there is risk in everything we do particularly with trading.

An effective option trading education package will involve some form of DVD’s, seminar or web tutorials. To learn option trading effectively I have found the best method is via DVD. I have read many books but they do not clarify options as well as DVD’s or perhaps a web cam tutorial. Find the best education you can but ensure it suits your particular learning style.

The use of a free live demo account can assist your option trading education. There is no better way to learn option trading then to be actually doing it without all the cash on the line. This will also give you familiarity with the system and interface you are considering using.

Your option trading education will also need to provide you with some form of trading platform. This platform needs to provide you with the tools to make your trading decisions. To learn option trading without the use of charts and data will be at your peril. The use of live prices will assist in making quick choices.

My personal option trading education was only complete by attending a seminar. This clarified all the grey areas as I was able to interact and discuss with fellow options traders. Most of which had experienced similar highs and lows as myself.

To learn option trading is not an easy task but the only way to do it is to take a risk. Open your mind and you will pleasantly surprised how easy options trading is once you push through all the jargon. Your first trade will be the most difficult but once you have made your choice stick with it until it no longer meets your trading criteria. If you can deal with your emotions then financial freedom is a very real possibility for you.

Author: Darron Martin
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How to Choose the Best Options Trading Strategy

April 9, 2010 · Posted in options trading · Comment 

The magic of options trading is that allows for a variety of strategies to be matched with different stock trading philosophies. Each strategy has a different profitability and risk tolerance level, and using a variety of strategies can spice up a portfolio very nicely! In this article, I will outline four different stock trading strategies, and how they can be matched with corresponding options trading strategies which you can apply to your portfolio. The main idea is to first focus on an underlying stock trading strategy, and then add significant leverage and power to the trade by using options.

The most important factor when considering each of these strategies is the concept of TIME DECAY. The value of any option declines over time, until the day the option expires. This concept can be the major enemy of any option trade, eating into its profits, or it can be the key to successful and profitable option trading.

Firstly, which Strategy?

There are generally four different strategies employed by stock traders, each of which has implications when applied to options:

(i) Position Trading

Traders buy a stock and hold it for long periods of time, based on good fundamentals of the company. They will often wait for a stock to reach really good value, and then watch for institutional or insider buying before making a move. As the stock price increases, they look out for other buyers to step in and move the price even further.

APPROPRIATE OPTION STRATEGY

Buying calls and puts is NOT appropriate, because you pay large premiums for time value, most of which could be wiped out over time even as the stock gains in price. TIME DECAY is your enemy.

Selling covered calls each month in the option cycle on the stock you already own can significantly reduce the cost you paid for the stock in the first trade. Even if the stock goes down, you can still come out a winner!

(ii) Momentum or Trend trading

Once a stock has made clear move or breakout, the Momentum traders step in, and ride the stock up along a trend to its first major reversal. They hope to make shorter term profits from a rapid move in the price. Holding periods range from six weeks to six months.

APPROPRIATE OPTION STRATEGY

Buying calls and puts is NOT appropriate, because you pay large premiums for time value, most of which will be wiped out over time even as the stock gains in price. TIME DECAY is your enemy with Momentum Trading, unless you have a particularly strong and fast moving trend.

Selling Credit Spreads is a good strategy, and in fact can be very profitable, because as you sell spreads on the opposite leg from the stock’s direction of momentum (e.g. selling put credit spreads in stock with a strongly bullish trend), you can repeatedly buy back the spreads for minimum cost and sell another spread closer in. This strategy can easily yield 10-15% profit per month. Time Decay is your secret weapon for trading this strategy.

Selling Naked Puts is a good strategy, and can be even more profitable than selling credit spreads. However, it leaves you a position of possibly having to buy a lot of stock if the trade goes against you, and so your broker requires you to have a lot of margin.

(iii) Swing Trading

Swing Traders buy and sell swings or oscillations within a trend. Holding times are from between 2 and ten days. This is a shorter term trading technique that is more dependent on the trend direction than it is on fundamentals or technical indicators.

APPROPRIATE OPTION STRATEGY

If you have mastered the skill of identifying reversals or swings within a trend, and know how to plan an exit strategy, you will be able to start buying calls and puts, or DITM options, which will take you to real profits! With Swing Trading, holding times are short (2-10 days) and so you minimise the effect of your arch enemy, TIME DECAY.

(iv) Day Trading

Day traders focus on the many small moves that happen during the trading day, mainly shown up by candlestick patterns. This strategy has a broker’s requirement of a minimum of $25,000 to qualify, which knocks out many beginners.

APPROPRIATE OPTION STRATEGY

Option trading is not appropriate with this strategy. Broker fees for options trading are quite high, and Day Traders end up paying vast sums to their brokers.

In Summary:

If you own at least 100 units of a stock that is not particularly trending in any particular direction, sell Covered Calls each month in the option cycle. You can reduce the net price that you originally paid for the stock by between 5-12% each month.

If you have at least $1,000 in your account, and can identify a trend, you can easily sell Credit Spreads or Sell Naked Puts each month in the option cycle.

If you have mastered Swing Trading principles, especially the idea of planning entries and exits, you can start to buy Calls and Puts, or DITM options and make phenomenal profits.

Author: Rob Forbes
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Your Fortune with Option Trading

April 6, 2010 · Posted in options trading · Comment 

Why are you investors missing out on the massive potential of option trading? The savvy traders are already maximizing their income, using both their prior experience in the markets and their well researched know how to make a fortune! With option trading, you will have a huge advantage. Not only can you significantly increase your existing income, you can also offset any stock devaluation against your gains from the options. Investors should have an established foothold in the stock market, and have at the very least a good foundation and knowledge of buying and selling stocks before dabbling in option trading. There is a whole host of information on how to make a fortune – with option trading, as well as stocks and futures!

What is it about option trading that is holding you back? Are you scared of losing money or are you afraid to invest in something you don’t know how to do well? Maybe you already make a fortune with stocks, and think that your investments are secure. In that case, you won’t ever need to get involved with option trading, as you’re so confident that you won’t have losses in the future.

You may already be dabbling in option trading, but you are not getting the results you expected and want to get on the right path to make your fortune. Either way the clever investors should know:

Options work in rising markets – so what?

Ok, so your stocks work for you in rising markets, what advantage would there be by investing in options? With option trading you are not only gaining from the rise in stock prices,you will also make money by selling your call options.

Options work in declining markets – how can that be?

You can protect your stocks with option trading, buying “put” options that act as an insurance policy against share prices falling.

Less risk, more protection.

Options traders minimize risk and potentially lose less money than those trading in stocks, where your maximum risk is the amount you have paid for the option.

Option trading gives you more leeway.

For each change in the positions, you will have a counter strategy to profit from the move.

This is only the tip of the iceberg. If you want to know how to make a fortune with option trading, the first thing you will need is an online account. Do a bit of research first, find stocks you think will go up and buy CALL options. At the same time, look at stocks you think will fall and buy PUT options. This will allow you to begin trading in options with minimal risk.

As with all financial investments, you need to be fully aware of the potential risks before investing, and seek advice from a broker if you need help. Find out more about option trading and avoid the pitfalls before you begin.

Author: Brian Lee
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What Do You Know About Stock Option Trading?

April 3, 2010 · Posted in options trading · Comment 

For most of us, when we hear the words stock option trading, we automatically think of shares of stock being purchased and sold on the Stock Exchange, but in actuality stock option trading is something completely different from that. For those of us not too familiar with the ins and outs of trading and the stock market, when you trade an option, you are trading a right to a stock. That right then gives the owner the authority to purchase or sell a certain stock within a set amount of time, for a pre-determined price. Not only are rights to securities and stocks sold in this manner, but government bonds, foreign currency, and stock indexes also use option trading.

If the option being traded is a right to buy securities, you may hear it referred to as a call option. A put option is a right to sell those securities only, with no buy option. If you hear the term double option, it is a combination of a call option and a put option, which gives the owner to power to both buy and sell the securities. Call options are usually used for securities that are thought to gain in value in the near future. For traders, call options give them the power to get a rising stock locked in at a low price, so that they can turn around and then sell that stock for a nice profit, assuming that the value rises as predicted.

If for some reason the value of the stock fails to rise as expected, then the trader is not required to make any purchase, thus protecting his funds. Traders often use put options when a certain stock is thought to be falling in value, just the opposite of the call option. When a trader purchases a put option, he is required to pay a fee to the person selling him the option, often quite a hefty one at that. This fee is referred to as option money. If the person who purchased the option doesn’t use it, he only will lose the fee, or option money, that he was required to pay for the original put option.

Oftentimes, a smart trader can use put options to secure their own funds, and sometimes, make a great profit for themselves in the meantime. Keep in mind, that anytime you invest money in stocks or options, you do stand a chance of losing those funds, so you should only trade with money that you can afford to lose. Don’t use your mortgage money, or your child’s school fees to play on the stock market, it’s just not a wise thing to do, especially if you don’t have a clue to what you’re doing. Make sure you have a good solid trading foundation and education before you take the plunge. Some good ways to better educate yourself on the workings of stock option trading, is to invest in stock and option trading products, such as ebooks, magazines, stock trading sites, or even go for a well recommended trading seminar.

Options’ trading is a good way to cover yourself from major losses, in the event you make a bad choice or call on a particular stock or investment. Many people are also now starting to participate in online options trading as well, which makes it easier and faster, since it can all be done right from your home computer.

Author: Brian Lee
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