All you want to know but never asked about the stocks and options markets.

martes, 21 de junio de 2016

Binary options, investment or bet?

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binary options, bet or investment

The options, in general, are financial products that are part of the group of derivatives.
Theoretical definition: An option is a contract between two parties whereby one acquires on the other the right, but not the obligation, to buy or sell a specific amount of an asset at a certain price at a future time.
Previously we saw the overall functioning of the most frequent options known as call and put options options.

Binary options are named options but the truth is they should not, as these contracts do not give the buyer the right to exercise any option. These derivatives are a trading instrument in which the investor can win a fixed gain or lose all the amount invested.

So, binary options trading is more like a sports bet in which you earn an amount of money if, for example, England win a match of the European Football Championship. If the team loses or draws,, you lose all the money wagered.

They are essentially a bet on whether an underlying asset will trade above or below the current price at expiration date. As with any financial product, it is important to fully understand their features and implications, to see if they can be useful in our investment strategy.

Example of a binary options trade

Let's say a particular analysis leads us to consider that the S&P 500 will be bullish throughout the day, although we are not sure how much it will rise.

We decided to buy a binary call option for $100 on the S&P 500 index that will pay us 70%. The S&P 500 is trading at that time at 2,000 points, and therefore, if at the time of maturity the index is above 2,000 points we win $70 (70% of $100) and the broker returns us the initial amount invested ($100), ie a total of $170.

On the contrary, if at the time of maturity the S&P 500 below 2,000 points then we lost all our investment.

Advantages and Disadvantages of binary options 

Binary options are simple to understand. You just have to decide whether the related asset will rise or fall. There are no liquidity problems as the buyer never owns the underlying asset and therefore the broker can offer many execution rates and time horizons.

As with any investment product, there are positive and negative aspects that we must consider if we consider trading with these derivatives. The main drawback of binary options is that profit is always lower than risk (if you lose, you lose all). This implies that the investor must have a trading strategy with very high percentage of winning trades.

One of the few advantages of using binary options is that the relationship between risk and reward is known in advance exactly. No matter how much the market moves in your favor or against you. There are only two possible outcomes: win the amount stipulated or lose all. As with any financial instrument, binary options can be a bet or investment depending on the strategy used by the investor.

For investors who want to bet on the fall or rise of underlying assets such as indices, equities, commodities or currencies, among others, there is the possibility of trading with real options through warrants. Warrants are options and are part of the family of exchange-traded products. These products have the advantage  that they are exchange-traded, so they can be sold before maturity.

For more information on binary options please consult the following link: 

-Binary options trading and brokers

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