Many investors consider trading stock using binary opportunities as an alternative method of trading this asset type directly. This is because they can then utilize binary options to speculate on the price movements of stock in a similar way as if they traded the actual stock of those companies directly.
However, you must appreciate that there are significant differences between trading stocks directly and using a binary option to do so. One of the main differences is that in the first case, you will own part of a company after you purchase a stock whereas in the latter you are just acquired the ‘rights’ to buy or sell the stock of your chosen company at a selected price.
You have no ownership rights when you trade stocks using binary options. Basically, stocks are issued by their parent companies whereas stock options are independently underwritten by the market makers and are not related to their underlying companies directly.
You can either open ‘call’ or ‘put’ binary options that have underlying assets based on the stocks of companies. A ‘call’ selection allows you to buy stocks while you can use a ‘put’ to sell them. The price of a stock option is called a premium. There are many advantages that you can enjoy by trading in stock binary options instead of the stocks directly.
For instance, you just need to determine the direction that the price of a stock will advance before an expiry time and not its size or magnitude. This feature alone removes a significant amount of uncertainty out of your trading and seriously reduces the amount of research you will need to do per trade. This is because actual stocks of companies can produce the most complicated price formations and patterns because of the large number of influencing factors. When you trade stocks directly you need to analyze these causes in depth whereas you do not have to perform such research when dealing with options.
In addition, you will always have a good understanding of your exact risk and profit potential even before you activate all your stock options. You will know that you will receive a pre-determined profit when your expiry time elapses which can be as high as 78% of your initial deposit. In contrast, you will also clearly understand your risks because you will know that you will receive a refund between 10% and 15% of your investment if you are out-of-the-money at your expiry time.
You therefore can enjoy a pre-calculated risk and money management when you trade stocks using binary options. This is a great advantage compared to trading stocks directly when you will have to design your own protections in order to minimize your risk exposure.
As already mentioned, you will profit by using ‘call’ binary options if the value of your chosen stock finishes just one trading increment higher than its opening value at its expiry time. Conversely, you need your ‘put’ binary options to have a value of at least one trading increment below its strike or opening price at expiry in order to receive a pay-out.
You can improve your profitability at trading stock options if you invest your time to learn and master binary options trading strategies. Here are a few common ones which have provide many investors with success.
You can pair ‘call’ and ‘put’ binary options in order to provide yourself with a window of opportunity for a large compounded profit while minimizing your risk exposure. For example, imagine that you have activated a ‘call’ stock option at a price of $10 and you are now in-the-money because it has risen in value to $14. However, you are concerned that a price retraction could occur before your expiry time elapses. What can you do to lock-in your profit? One answer is that you could open and pair a ‘put’ stock option at this point. By doing so, you would have created a window of opportunity between $10 and $14 whereby both options could close favorable producing a double profit. Alternatively, you risk exposure is also minimized because if both options close outside this range then the loss or refund of one (about 15%) will be partially countered by the profit of the other (about 78%).
You can also use strategies that will help you hedge your investments. For example, consider that you think that the shares of Apple will rise because of a current release of a new product. In addition, after you analysis the market of this device you conclude deduce that it could adversely influence the market share of rivals such as Microsoft.
Consequently, you could activate a hedging strategy as follows which would have the potential for a large payout while minimizing your risks.
You could open a ‘call’ binary option with Apple as its underlying asset while at the same time activating a ‘put’ binary option with Microsoft as its base. If your research is well founded then you could make quite a killing in a relatively short time.
As you can conclude after analyzing the above trading examples, trading binary options based on stocks presents you with exciting profit opportunities.