Binary options for dummies

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Old Jul 29, 2008, 8:03pm   #1
 
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Binary options for dummies

Binary options are good for beginners that want to get their feet wet, without worrying too much about all the jargon used in trading stocks. With binary options you either win or lose – there is no in between. The basic concept is that you buy a contract, either in the buy or sell mode and if the stock does as you predict you will receive money and if you were wrong, you lose it all.

Of course, this can still be quite confusing. Binary options are not available with each and every stock out there. A matter of fact, it can be hard to find the ones that offer this option.

The CBOE lists two stocks with binary options - VIX and SPX. The American Stock Exchange lists stocks with binary option as FRO and include Apple, Inc (AAPL), Cisco Systems, Inc (CSCO), Citigroup Inc (C), DIAMONDS (DIA), General Electric (GE), Goldman Sachs (GS), Google Inc CL.A (GOOG), Home Depot (HD), IBM (IBM), Intel (INTC), iShares MSCI Emerging Markets (EEM), iShares Russell 2000 Index Fund (IWM), JP Morgan Chase (JPM), Microsoft CORP (MSFT), Oil Service HOLDRS (OIH), PowerShares QQQ (QQQQ), SPDR S&P 500 (SPY), Select Sector SPDR-Energy (XLE), Select Sector SPDR-Financial (XLF) and Wachovia Corp (WB). Every stock exchange has their own binary options, so you will have to learn which ones are available with this type of option or listed as FRO’s.

Now, to explain the concept. Binary options give investors a wide variety of trading options in that some are short-term trades while others may be quarterly since they are based on the date of expiration. You as a binary option trader will choose the stock that you wish to buy or sell by if you believe the price will go up or down on the date of expiration. If you think the market price is going to be higher then you buy. If you believe the market price will go down then you sell. If you choose correctly, then you receive payoff on each contract you had on that stock.

Normally, the price you will receive is a fixed amount, such as $100. This means you will receive $100 for each correct contract. If you buy and spend $25 and the stock rises or are equal to the strike price on expiration, you will receive $100 for each contract. However, if you are not correct you will lose your investment all together.

Metals and energy can also be bought and sold with binary options and be watched through the New York Mercantile Exchange. With the economy the way it has been heading, many investors are buying and selling foreign currency with the hopes of making a quick buck while others are looking to natural gas or crude oil.

Example of buying a stock with binary options

Light Sweet Crude Oil (CL)
The strike price for buying (calls) is at 20000
The strike price for selling (puts) is at 8000

Looking at the market and the strike prices you can make an educated decision in which way you believe the stock will go. Let’s say you buy. The last strike price for calls was at 15000 and now it is at 20000. When you buy in you are saying the price of light sweet crude oil will be at 2000 or more on the date of expiration. If you are correct, you will then receive the set amount of money, usually $100, per contract.

Example of selling a stock with binary options

If you put on light sweet crude oil, believing the strike price of 8000 will be that or less then you will receive $100 per contract if the set amount is such.

However, in both scenarios if you are incorrect and the strike price goes down with a call or up with a put then you will lose all money invested.

Example of buying or selling a stock with binary options long term

You can also call and put with stocks that do not have an expiration, except quarterly. This allows you a few more options. You can always change your mind, however, you will only receive the money you put into the stock.

If you have a contract for Gold in the amount of $80 but now you do not believe the price will be the same or more, you have the option of selling. Of course, you will sell at a loss, but you will not lose your entire $80.

However, if you leave it the same and you were correct in your speculation, you will receive the set amount of money per contract.

You need to watch the binary option price the stock is selling at. This can be a great way to make an educated decision if the stock with rise or plummet on the expiration dates.
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Last edited by tar; Mar 14, 2013 at 12:25pm. Reason: old link
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Old Jul 30, 2008, 11:13am   #2
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Options are inherently risky, the same as any other trade. Buying options is safer, since the maximum loss you can incur is known from the start, and is the premium you pay. People need to consider is this is the right tool for them, especially since most options expire worthless - around 80% I think. Selling options I would suggest is entirely inappropriate for most of the investors likely to read this here, and involves a significant risk of a potentially unlimited loss.
Binary options pay a fixed amount, and are essentially an exotic product, as opposed to standard vanila options. This fixed payout means your gain is also limited. As with all options, there is significant risk involved. If anyone is seriously considering investing in binary options, you will need to know a lot more about them than this article tells you (not being rude, please dont take offence!)

If anyone has any questions on binary options, I suggest you at least ask someone here to explain them in depth, and dont invest in anything you dont fully understand. There is no such thing as a free lunch remember!!
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Old Jul 30, 2008, 3:10pm   #3
 
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Iceberglettuce started this thread none taken. i was putting it here more as a guideline for people who as young as me(20) can get a better understanding of how some things work. in the case binary options because i took the time to write the article =)
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Old Feb 23, 2010, 1:44pm   #4
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Re: Binary options for dummies

I have just started trading at an online binary options trading broker. i have never traded before does anyone have any tips for trading?
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Old Jun 28, 2010, 2:50pm   #5
 
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Re: Binary options for dummies

Hello everyone.
I am new in this trading field and don't know much about how to trade to earn better profits, So please suggest me some website that helps me in earn more.

Last edited by tar; Mar 14, 2013 at 12:19pm. Reason: link
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Old Jun 28, 2010, 3:15pm   #6
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Re: Binary options for dummies

as a punt they are good as you can get great leverage.

problem comes when you try and hedge them. not easy at all.
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Old Jun 29, 2010, 1:56pm   #7
 
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Re: Binary options for dummies

Quote:
Originally Posted by morgan2074 View Post
Hello everyone.
I am new in this trading field and don't know much about how to trade to earn better profits, So please suggest me some website that helps me in earn more.
Hi Morgan2074,

Binary options are a great way for beginning traders to learn more about the market.

As stated by others, you really need to know what you are doing or you can lose a lot of money.



And here are some brokers that are regulated and you receive a contract for your purchase:
Chicago Board of Exchange (www.cboe.com)
North American Derivatives Exchange (www.nadex.com)

You can also go many sites and trade without a contract. These sites are harder to regulate, but reputable sites will do the following:
1. charge no fee for purchasing binaries
2. give at least a 70% return on "wins"
3. offer a partial return on investment of around 15% for "losses"

There are other sites known well in the business:
EZTrader
Tradesmarter


As an aside, I work for a company which partnered with a site called Bull Options. I can assure you that we take great pains to compensate traders for any technical problems that could occur on the site. Trading is completely in your hands.

Good luck!

Last edited by tar; Mar 14, 2013 at 12:18pm. Reason: links
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Old Apr 4, 2011, 5:35pm   #8
 
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Re: Binary options for dummies

Personally I think binary options represent stunningly bad value for money and you have to have a serious edge to overcome the spreads.

As an example pick an instrument, get a quote for expiry >= x and < x. Without spreads you should break even with these bets no matter the outcome, if you size them appropriately. Try it - you'll find you can't get better than a 25% loss of capital in many cases. 25% spread is simply daylight robbery.
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Old Apr 7, 2011, 9:21am   #9
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Re: Binary options for dummies

i trade binary options sometimes, but i prefer pair options. They are a similar product - but pair options are newer and more advanced.

The only pair options trading platform i know at the moment is stockpair.com

I've traded with them a few times, and they seem like an honest pair options broker
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Old Apr 13, 2011, 8:15am   #10
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Re: Binary options for dummies

I traded the Shell/BP Floating Pair Option on Monday with an end of day expiry time.

I received $114 on my investment when my Pair Option expired in the money. I'm not complaining. I am happy with my decision to trade with Pair Options, because I can choose my risks and rewards with a variety of different return percentages for different stock pairs.

Also, I prefer to stick with industries I know, which is one of the reasons I chose to trade the Shell/BP stock pair.

Regarding stockpair.com. They have given me good quality customer service with quick withdrawals and deposits since I opened a trading account with them.
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