Binary Options Trading – Stock Options

Digital is a term used by Option Range to describe the most popular binary option trade available: the ‘above’ trade / ‘below’ trade. This can also be described as the ‘up’ trade / ‘down’ trade.

The objective of a trader in executing an up trade / down trade binary option, is to determine whether the price of a particular stock, indices, currency or commodity will move above or below a predetermined strike price   by the time of the binary option’s expiration. An example is shown below:

Victor has been watching the equity markets and has been monitoring the progress of Apple Inc. on the NASDAQ. He has seen over the past few hours the trend is for rising prices. Victor has also read that Apple Inc. is due to announce the release of its next generation iPhone and as such he believes the price of Apple will continue to increase.

Victor decides to purchase a binary option. He thinks the price of Apple Inc. will be above its current price at the time of expiration in one hour. He subsequently purchases a one hour ‘Call Option’   for US $100 that has a fixed rate of return of 81%. This means if he has predicted correctly, Victor will earn $81 profit, as well as his original $100 investment. (Note: If Victor believed the price of Apple would be below the strike price at the time of expiration, he would have purchased a ‘Put’ option ).

The core advantage of a digital option is that there is a fixed rate of return . This means the trader can measure their total exposure , and subsequently their potential profit , before investing a single cent. Digital option traders can therefore fully control their risk and their levels of exposure to ensure they do not trade beyond their level of reserve, significantly increasing their chances of earning great returns on investment.

Constant price updates on the Option Range platform gives traders real time market pricing that allows traders to keep tabs on the price movements of their chosen digital options. It also means they can confidently use the extra trading tools which Option Range provides to its traders.

See below for a description of the trading tools available to traders on Option Range.

‘Close Now’ Trading Tool

‘Close Now’ is a tool that gives traders the ability to sell an option before its time of expiration. This has the advantage of giving the trader the flexibility to exit an option before the time of expiration to ensure profitability, or to minimise potential losses. The examples below show how the ‘Close Now’ tool can be used:

1.            Close Now to remain profitable.

Example:

Claire is an avid follower of currency markets. She has made a lot of profit in the past on EUR / USD digital options, and following her trading strategy , she decides to purchase a one hour Put Option for US $300 that has a fixed rate of return of 81% (meaning a potential profit of $243). During the hour, Claire sees that her technical analysis is holding true as the EUR / USD price steadily falls. However, with 15 minutes to go Claire sees a change in the behaviour of the currency exchange as the price begins to rise. Claire decides that rather than risk being in an out of the money position at the close of the option, she will ‘Close Now’ to ensure she remains in a profitable, or in the money , position. The rate of return is less than the 81% profit Claire would have received had she waited until the original expiration time and her prediction that the EUR / USD price was lower than the strike price, but Claire has ensured a profit is available to try her strategy again.

2.            Close Now to minimise losses.

Example:

What if the trader finds himself in a losing position?

Lars likes to trade commodities, and in particular gold. The past few months has seen gold prices rocketing as investors look to put their cash into a vehicle that ensures a greater degree of market stability.

Lars uses fundamental analysis strategies to calculate when he believes gold is most likely to increase in price. He has been very successful with this strategy and intends to follow it today to earn as big a return as possible.

Lars decides to use the profits from his past few weeks trading to try to earn a big payoff. He knows this is a risky strategy, but he believes in his analysis as this is what has got him his profits to date. Lars decides to invest US $10,000 purchasing a one hour Call option on gold. An 81% rate of return means potentially a massive $8,100 profit if Lars’ analysis holds true.

Following his purchase, Lars watches with satisfaction as the gold price continues to rise. After 25 minutes the price begins to fall. Lars is not too worried as he knows this type of fluctuation during an open trade is quite normal. However, this fall begins to look like a trend and as the gold price falls below the original strike price, Lars begins to become concerned. He still believes the price will rally, so he decides to wait it out. The price begins to rally but Lars now only has 5 minutes of his trade left. Rather than risk losing his entire investment, Lars makes the decision to ‘Close Now’ to minimise his losses. By closing the option early Lars retains a percentage of his original investment, which he intends to use to get himself back into a profitable position on his next trade.

‘Extend’ Trading Tool

The ‘Extend’ tool has been designed to give the binary option trader the ability to lengthen the time that his binary option remains open. This tool should be used when a trader believes that their fundamental analysis is correct, but that more time is required before their analysis will hold true.

Example:

We saw above how Lars believed his analysis was going to hold true, but that he felt that he was going to run out of time before the price of gold managed to recover. In the above example, Lars decided to ‘Close Now’ to minimise his potential losses. However, if Lars had used the ‘Extend’ tool, he would have been able to keep his option on gold open after his original one hour had expired.

The ‘Extend’ tool is available for a one off fee and had Lars used it, he would have kept his option open for an additional hour and would have seen that in fact his analysis had been correct, and keeping the option open meant the price of gold finished above his original strike price, returning a profit of $8,100. A very good 2 hour’s work!

Trading Strategies Explained

A number of basic trading strategies are explained in the Option Range eBook . Once traders are registered with Option Range, they will receive regular trading strategy tutorials that will help to extend and improve their trading knowledge, and their binary option trading strategies.

By following the tutorials, traders on the Option Range binary option trading platform have the chance to improve their understanding of the digital trading instruments, the tools and the strategies that can be used to help to see significant profits and returns on investment.