Use Binary Options to Trade Volatility

Use Binary Options to Trade Volatility

 

There are two types of volatility, historical and implied. Historical is simply the changes of the underlying asset’s price previously during a certain period. Implied volatility, then, is the market’s collective expectations about the performance of the asset in the future. A prudent trader is always aware of what the historical volatility has been and what the implied volatility is predicting the moves will be, as both of these factors are key to making the right decision on a binary options contract.

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The components used for an option’s pricing are the same in Binary options and classic options: market conditions of the underlying asset, the strike price of the option, volatility and time to expiry. Determining the price of a binary option is indeed the consensus of the market that there will be a certain outcome at a specific time. Pricing is highly affected by these important components, but let’s discuss the short-term opportunities that come with using binary options for trading volatility.

Using a flat market to your advantage with binary options

If you think that the underlying market will be still and/or will remain within a certain range, you can use binary options effectively to capitalize on your insight. The ITM (“In the Money”) binaries are the binary strikes to be considered, which means your initial cost is a larger portion of the maximum $100 expiration payout. Here, you are paying for the immediate advantage; higher probability of success = higher initial cost. This strategy allows you to buy or sell the binary option contract immediately which is in the money, or to create a combo trade where both legs would be ITM. In the latter case, if the market remains flat and finishes within the two strikes you will receive a double payout, but one binary leg will always finish in the money at expiration. As your binary is already in the money, you want the option to expire as quickly as possible; actually with binaries time decay works in your favor for ITM options.

How to trade binary options in a volatile market

If you believe that the underlying market will be volatile, and are prudent when it comes to trading in regards to the expected risk, then using binary options can be a useful tool to capitalize on your perspective. You would consider the OTM (“Out of the Money”) contracts, meaning that your initial cost is a much smaller portion of the maximum $100 expiration payout. As with the ITM binaries, the initial cost is related to the probability of success. This strategy allows you to either buy or sell the option immediately (directional trade) which is out of the money (OTM), or you can create a combo trade where both legs would be OTM.

There is a strategy that can be used to capitalize on this market scenario, which is buying high binary strikes and selling low strikes. Taking positions with cheap entry costs and making profits if the anticipated underlying market move is correct will come with a bigger percent payout.

 

 

 

New Binary Options Fraud Alert Released by FINRA

New Binary Options Fraud Alert Released by FINRA

 

In case you needed another reason to limit your binary options trading to the regulated exchanges in the United States, FINRA (the Financial Industry Regulatory Authority) has just released a new alert for investors who trade binary options. Even binary options traders who play it safe and always use the regulated exchanges will want to keep their wits about them at all times to prevent being scammed by these fraudsters.

 

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Binary options scams more common than ever

The increasing popularity of binary options trading has created a market for scammer and criminals to try to take advantage of investors. Binary option contracts, being all-or-nothing propositions, are risky enough without having to worry about fraud. The SEC and CFTC have released similar alerts in the past, and now FINRA has released a report about the different types of scams that they have received complaints about on their hotline. You can prevent being a victim of binary options fraud by only trading on the regulated Nadex, CME or the Cantor Exchange, which are overseen by the CFTC and subject to strict rules designed to protect investors and their money. You should also be aware of the specific tactics used by scammers so that you can spot fraud without before it’s too late. Here are the most common scams reported to FINRA according to the October report.

Refusal to credit binary options traders’ accounts

This is the most common tactic by unregulated, fraudulent binary options trading firms. Often these scammers are located outside of the US, but they prey on US investors by pretending to be a legitimate means to trade binary options contracts. However, after you have invested your money in an account with them, you’ll be lucky to ever see it again.

A spinoff of this scam is requiring investors to pay a fee before they can withdraw money from their account. As you probably guessed, this is just a way to steal an extra $25 or $100 from you on top of all of the money you put into your account, which they now have complete control over.

Impersonating government financial authorities

This scam is closely related to a common IRS scam, where investors are contacted by a fraudster claiming to be working for one of the government regulatory agencies. They then accuse the investor of participating in illegal binary options trading and threaten them with imprisonment if they don’t immediately pay a fine.

Stealing personal information from binary options traders

In addition to stealing your money, some fraudulent binary options trading firms are interested in stealing your sensitive information, too. If you trusted them as a legitimate financial institution, you wouldn’t think twice about handing over your full name, billing address, social security number, bank account information, etc. which the criminals will then use for their own purposes.

Software manipulation to cheat traders out of their winnings

This is the most subtle of the scams mentioned in the FINRA report. You might have registered a trading account with an unregulated binary options firm that is using software to turn your winning trades into losing ones without you even knowing it.

Binary Options or Day Trading?

 

Binary Options or Day Trading?

It’s possible to make (or lose) money with by trading binary options or by day trading, and the two types of trading may appear similar on a superficial level, but there are some important differences between them.

 

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Binary options overview

With a binary option, you either make a fixed profit or a fixed loss. Binary options can be available on different kinds of underlying assets, from stocks and commodities to major events such as jobless claims announcements. A binary option is about a yes/no question; traders are, in a sense, gambling on whether an asset’s value will be at or above a certain amount (the strike price) at a specified time (the expiry), or whether it will be below this amount.

The price at which you buy or sell a binary option contract is not the actual price of the underlying asset, but a value between zero and 100, depending on the probability of the asset’s value reaching the strike price. The trading range for a binary option contract will fluctuate throughout the day, but always settles at either 100 (if the answer is yes – the price is at or above the strike price) or zero (if the answer is no). The trader’s profit or loss is calculated by subtracting the price at which they bought the contract from the settlement price of zero or 100.

Day trading overview

In day trading, positions are opened and closed during the same session, which is not a fixed time period, although it is rare that a position is kept open overnight. Day traders buy and sell different kinds of financial instruments including stocks, commodities, forex currencies, etc. Day traders also attempt to predict the direction of the price movement of an asset, but their profits and losses are not fixed and depend on their entry and exit price, the size of the trade, the number of shares, and money management techniques such as stop loss and limit orders.

For example, a day trader might enter a trade and set a profit target of $100 and a stop loss of $25. Unless they put in a limit, they can let their profits run above $100 to fully benefit from a large price movement. If a day trader held onto a trade and didn’t put in a stop loss order, the loss on an unfavorable trade could quickly get out of control as the trader waits desperately for the price to move in the other direction.

How are they different?

In a nutshell, binary options allow traders to know in advance what their maximum profit could be and what their maximum risk is, while in day trading it is only possible to restrict trading outcomes by placing limit orders and stop loss orders. That is, if a day trader does not use proper money management techniques, both their potential profit and potential loss are entirely unknown and possibly limitless.

Binary options also have a fixed expiry date and time, while day traders have the option to close their position at any time or wait for a limit or stop loss to be triggered. The holder of a binary option also does not have the right to buy or sell the underlying asset, while the day trader does.

Benefits of Exchange Traded Binary Options

Benefits of Exchange Traded Binary Options

 

There is a lot of confusion about binary options, but the simple truth is that they can be a great trading instrument as long as they are structured properly and traded on a regulated exchange. Generally, all binary option contracts share the same name, but there are many different types of them. Basically, all binary options share one characteristic: that is, there are only two potential outcomes, “all or nothing”. For many of the financial instruments sharing this name, however, that is where the similarities start and end.

 

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Legitimate binary options trading

If you have ever had a negative feeling upon hearing the term “binary option”, maybe it is because you have heard of, or even participated in trading binary options at off-shore firms. The number of firms like this has increased remarkably over the last several years, claiming they offer “an easy way to get huge profits from a small investment”. As with most get rich quick schemes, this is too good to be true. The activities and conduct of said offshore firms has been formally condemned, and a joint fraud advisory was issued by the CFTC and SEC in June of 2013, alerting investors about the complaints they had received about firms making such outlandish claims. In this advisory they also explained what an investor should look for in legitimate firms offering binary options. But unfortunately, confusion still exists.

As explained in the CFTC/SEC Fraud Advisory note, Nadex (North American Derivatives Exchange) and the CME (Chicago Mercantile Exchange) are the only exchanges to legally list binary options in the United States. U.S. Exchanges are regulated by government agencies concerned with protecting traders and investors. They hold the exchanges to extremely high standards as part of this protection. The SEC and the CFTC are the two agencies responsible for maintaining a fair marketplace. Exchanges that hold member funds have strict requirements as to how this money is allowed to be handled, as part of the regulatory structure. This means that, in general, funds must be held in segregated accounts with highly stable and secure financial institutions. Moreover, when members wish to withdraw funds, the exchanges must provide a withdrawal process that is easy to understand and fast.

Regulated binary options offer transparency

Aside from general consumer protection, one of the main benefits of trading binary options on a regulated exchange is the transparency of the markets. Because determination of the prices of these contracts is derived from and settled against a 3rd party market, traders have complete transparency, and the exchange will provide time and sales data for verification to respond to any question a trader may have regarding a settlement. Basically, an exchange matches buyers and sellers in an unbiased manner. To avoid conflicts of interest, neither the exchange itself, nor its employees, may take positions in its markets. And, unlike some OTC firms, exchanges never set the prices or hedge the other side of your trade.

Exchanges must publish rules that are well established and clearly defined. Any rules that do change need to be approved by the appropriate supervising authorities and investors must be notified of the rule change before it takes effect. Some of the offshore firms do not do this, and in reality are operating as little more than glorified bookies, taking bets on where you think a price will move.

 

Capital-Protected Investments and Binary Options

Capital-Protected Investments and Binary Options

The security of an individual investor’s money is usually their primary concern, and we can often see this reflected in their investment choices. For example, a high level of capital security is guaranteed by Treasury bonds and bank deposits, while there is always a risk of loss along when investing in equities and mutual funds which can affect invested capital to a great extent. Finally, higher levels of risk are always carried by derivative products such as options and futures, as you can lose a bigger amount than that you actually invested.

 

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The concept of capital-protected investments

Lots of mutual fund firms work with the concept of “capital protection”, and some have launched capital guarantee funds, which provide an upward return potential while also guaranteeing the preservation of the invested amount. And this gets even more interesting when individual investors can merge bonds with binary options in order to similarly create their own capital-protected investment products.

U.S. Treasury bonds provide guaranteed risk-free returns. Let’s assume a one-year Treasury bond offers a 5.5% annual rate of return.

Bond returns are calculated using the formula:

Maturity Amount = Principal x (1 + Rate)^Years

For example, investing $5,000 in this bond for one year will get you a maturity amount of:

Maturity Amount = $5,000 x (1+5.5%)^1 = 5,000 x (1+0.055) = $5275.

To preserve this capital of $5,000, the above formula can be reverse engineered: “How much do I need to invest today to get $5,000 as a maturity amount after one-year?

Here, Maturity Amount = $5,000, Rate = 5.5%, Time = 1 year, and we need to find the principal.

Principal = $5,000/(1+0.055)^1 = $4739.34

Investing $4739.34 in the above bond will secure your capital, since you will get $5,000 at maturity.

Binary options as a capital-protected investment

The remaining amount, $5000 – $4739.34 = $260.66, can be used to purchase binary options, which offer high return potential. Say you believe that ABC Inc. stock currently trading at $30 has the potential to hit $55 in one year’s time. A binary call option on this stock with one year to expiry and $50 strike price is available at $37. You can purchase seven such binary options totaling $259, which fits within the available money ($260.66).

If your assumption comes true, and ABC stock reaches the strike price of $50 or higher, each of your binary option will give you a $100 payoff($700 for the seven binary options). Your total return from bond and binary option comes to ($5,000 + $700) = $5,700. On your total invested amount of around $5,000, your net percentage return comes to ($5,700 – $5,000)/$5,000*100% = 14%. In this case, your capital remains protected and you also earn returns that are significantly higher than what you could expect from a bond alone.

If you are incorrect, and ABC’s stock isn’t able to cross the strike price of $50, then you lose your option premium of $259. In this case, you lose out on the excess returns, but your capital is still preserved.

In both the cases, the capital remains protected because of the Treasury bond. The potential of an upward return comes from the binary options.

Though mutual fund firms may provide similar ready-made products, they might cost a lot and might not be suitable for an individual’s choice of investment horizon or underlying assets. Creating such capital-protected investment products offers the flexibility to go for the choice of underlying security, investment horizon, or bonds.

Benefits of Binary Options Trading

Benefits of Binary Options Trading

Day trading binary options is quite a simple idea. The trader opens a trade position and closes it within the same trading day. Lots of articles discuss the drawbacks of this particular type of trading, but binary options do have their redeeming qualities. This article discusses some of the key benefits of binary options day trading.

 

Stock Market Diagram
Stock Market Diagram

You may have heard them referred to as digital options in the forex or interest rate markets, and they are also known as fixed-return options(FROs) or all-or-nothing options in the stock market. Collectively, we call them binary options because they offer returns in only two outcomes: a predetermined amount, such as $100, or nothing. The following assets can be used in general for binary options day trading:

• Currencies (forex market)
• Stock indexes
• Stocks (equities)
• Commodities (limited)

All binary options contracts have an expiry date and time; generally, that means there is a fixed expiry date for the standard binary options contract, unless a platform the trader is using offers a variable option expiry.

Advantages of binary options day trading

When you buy a binary option, the potential profit is already calculated and known to the day trader before making the purchase. And as binary opt

ions can be used on nearly all financial products and in either direction (call or put), day trading with binary options can be easy and immediately pays out the resulting high returns.

Besides the potential for fixed, high profits, several benefits are offered by binary options to the day trader:

• There is no broker involved; this means lower costs because of the lack of fees and commissions, and traders can manage their accounts on their own.
• Traders can trade diversified options at the same time.
• Traders can make small, multiple initial investments, giving an accessible form of day trading with a limited amount of risk. This makes it possible to make up for many losses with one successful trade.
• Minimum account balances may be lower or nonexistent compared to other forms of day trading.
• There isn’t any unnecessary downtime, so traders can profit from many constant opportunities during the day.
• Traders can select changeable time expiries to be suitable for various strategies.
• The private method of trading in this market provides a high level of innate se

curity.
• As the involved clear risks and the short timeframes in the day trading of binary options, volatility is much less significant.

Smart day traders won’t need to adjust their strategies in order to attain constant returns; they can do this by recognizing and following one of the successful trends and patterns in the market. Additionally, false trends that appear due to the short trade times can be exited rapidly to minimize any kind of loss if the trend is not working.

Binary options can be both rewarding and exhilarating for some day traders. The potential return is high, and the turnaround can be really fast. For the day trader, there is always a new opportunity to capitalize on due to the constant expansion in the binary options market.

How to Avoid Fraud in Binary Options Trading

How to Avoid Fraud in Binary Options Trading

Binary options trading has experienced a recent popularity surge, and as a result new online trading sites for binary options are turning up practically every day. Binary options trading is different from other more conventional types of investments, but are still subject to laws governing the buying and selling of assets such as securities and commodities. Unfortunately, many online binary options trading sitesare not registered with any government regulatory or supervising body and as such may not be compliant with federal laws and regulations. More importantly, however, they may be avoiding government regulation in order to take advantage of you. This article will help you arm yourself against the most common types of binary options fraud.

 

 

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What is binary options trading?

Binary options are based on a simple yes/no call: will the value of ABC be at $x or higher at a specified time and date? If the investor believes that the value of the asset will exceed the specified value when the option expires at the specified time and date, he will buy the binary option at the “bid price” (meanwhile, someone else is selling the option at the “ask price”). Before any buying or selling takes place, there is a pre-determined payout for the investor if he is correct in his prediction. For example, let’s say an investor has the option to buy in at $53.00, and the payout is a potential $100. If he is correct when the binary option expires, he will earn the $100 payout and make a net profit of $47.00 (in the money). If he is incorrect, however, he will lose all of the money he invested in the option and be $53 in the red (out of the money).

Common binary options online scams

There are three types of complaints that the main regulatory bodies, the SEC and CFTC, receive quite often about unregistered and unregulated binary options trading sites. The first way that fraudulent binary options sites will scam their customers is by refusing to credit them after a winning trade, while stealing the money that was invested. The second type of binary options scam is luring you in with the promise of big investment gains while actually stealing your identityand personal information. And lastly, some online binary options sites may use software to manipulate the trades so that their customers lose more often than they should.

How to avoid binary options scams

You have to do a bit of homework to ensure you and your money stay safe when you are investing in binary options. You first need to check that the binary options site is registered with one of the proper regulatory bodies:

SEC: www.sec.gov/edgar/searchedgar/webusers.htm and www.sec.gov/divisions/marketreg/mrexchanges.shtml

CFTC: http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=TradingOrganizations&implicit=true&type=DCM&CustomColumnDisplay=TTTTTTTT

Lastly, and this is useful for traders in all markets, you need to confirm the registration status and background of the bróker, brokerage, investment firm or financial professional you are going to invest your money with.

FINRA BrokerCheck: www.finra.org/investors/toolscalculators/brokercheck/

BASIC Search: www.nfa.futures.org/basicnet

If you can’t find your trading site registered with a regulator body or can’t confirm their status via one of the brokerage search tools, don’t invest any money with them and don’t share any personal information with their site.

Use Binary Options to Trade Forex

Binary options are another tactic to trade forex, as well as other commodities and securities. Although they cost relatively more than the leveraged spot forex trading offered by more and more brokers, the major advantage of binary options is the fact that the maximum potential loss is limited and specified in advance. While leveraged forex trades offer potentially higher profits because of the leveraged capital, the losses are also multiplied significantly and unknown at the time the order is called.binary-options-trading-broker

What are binary options?

Binary options have a binary outcome, that is, when the option expires, they either settle at a pre-determined payout value (generally $100) or $0. For the buyer of a binary option contract, the cost of the option is the bid price at which the option is trading. For the seller of the contract, the cost is the difference between 100 and the option price. The buyer receives his payout from the seller if the asset is trading at or above a predetermined value at a predetermined time. If the asset is trading below that value, the buyer loses the amount they paid for the contract, which goes to the seller.

From the buyer’s point of view, the price of a binary option can be considered as the probability of the success of the trade. So, as high the binary option price gets, the perceived probability of the asset price rises above the strike. From the seller’s view, the probability is 100 minus the option price. All binary option contracts collateralize completely, which means that the buyer and seller have to decide the capital for their side of the trade. For example, if a binary options contract is trading at 45, the buyer pays $45, and the seller pays $55 ($100 – $45). This is the maximum risk of both sides, and equals $100 in all cases.

How are binary options traded?

There are a number of assets and securities in the US that are available for trading using binary options. A binary option’s value is derived from an underlying security or asset. The purchaser of the binary option contract does not own the underlying security, nor have claim to it. Yet, the binary option’s worth is based on the movements of the underlying security price. Binary options offer an alternative way to trade these underlying securities that include stock and volatility indexes, forex currency pairs, and commodities.

Binary options are traded through the Nadex exchange and the Chicago Board Options Exchange (CBOE). Nadex provides the majority of binary options trades in the country; its binary options are traded through its own self-maintained trading platform, and an external broker isn’t needed. The CBOE offers two binary options products:binary options contracts are limited to the S&P 500 and Volatility Index. Clients need a standard brokerage account with options trading capabilities to trade these products through the CBOE. Online binary options trading sites do exist, but must be used with caution; many of these sites operate illegally and are not regulated by the SEC or CFTC, and fraud among such unregulated sites is not unheard of.