Options’ trading is considered to be a great trading vehicle, because it is so easy to navigate from start to finish. For those who don’t know, in finance, an option is a contract that gives the buyer the option to either proceed with the said transaction on the set date. If the buyer wishes to, he/she could opt out of the contract. As the trader, you are betting on the price of the underlying asset at the closing time, which is the expiry date. If you bet successfully on the option, you will earn a return on your initial investment.
In basic terms, currencies, commodities and stocks could all be underlying assets. As the buyer of the option, you are simply investing on the performance of that asset. If the asset moves in your favourable direction, you will be able to make a decent profit.
There are two main options in trading and they are call options and put options. When you place a put option, you are hoping that the asset price will move above the current price. On the other hand, if the final value of the asset rests under the current value, you will make a profit, assuming you placed a call option. Returns will vary for the different types of options you are buying. If the option does not perform as you hoped it would, you will receive a fifteen percent refund on the amount of money you put in. Rates of return will vary, so knowing where to invest and when to place the right options is important for a trader.
If you are unsuccessful in your trade, your option will expire out of the money. When this happens, your online account will usually get credit with the refund. If you had placed a hundred dollars on a call option, you will receive fifteen dollars as a credit. As you see, the rate of loss in all cases will be eighty-five percent, so that is something you need to think about. There is also a maximum amount of money that you can invest on one option. For one single option, you can only place a maximum of three thousand dollars. As the trader, you could purchase as many options as you wish.
The final price at which your option expires is known as the expiry level. The expiry level is what tells you whether your option expired out of the money or in the money. The ability to choose the expiry time is one of the benefits that traders find so flexible with options trading. When you have that control over the option, you could use economic trends and strategies to base the trading on.
What happens when the final expiry level price is the same as when you purchased at? This does happen sometimes, and in the event that both prices are the same; you will receive a full refund for your money. It would be unethical to lose all your investment when the price hasn’t even moved at the time of expiry. Finally, an option trading only takes place when the market is open, unlike the currency market where trading runs five days a week.
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A binary option is a simplified derivative . A derivative is a security whose value is derived from another financial instrument. Types of derivatives include options, swaps and futures. Derivatives are typically complex instruments that are only used by and available to sophisticated investors and financial institutions. However, binary options are very simple to understand, and available to everyone.