Online Investment – Binary Options


 

Binary Options (BO) trading is probably the furthest from Value Investing (VI), when it comes to investment fundamentals. While in VI we focus on the business behind the symbol, A BO trader is almost completely concerned with current price movements. Some BO platforms offer options with a 15-minute life span!

BO is a relatively new version of day trading. Most BO transactions finish within an hour. Recently, some platforms started giving the trader the option to choose longer expiration periods.

The basic concept behind BO trading is to “predict” if the “asset’s” price is going to move up or down relative to the entry price.

Here’s an example: Let’s assume the trader is interested in crude oil’s price movements. The trading platform offers crude as one of the available BO assets. The trader needs to have some funds in his or her account in order to trade. The minimum amount per BO trade varies from one platform to another. Usually between $10 and $50.

Let’s say the platform in this example requires $30 to trade one BO asset. The trader selects crude, enters the minimum trading value, which is $30, then he or she has to decide, or “predict”, whether crude price will go up or down from the current price, say at the top of the hour.

From looking at the charts; trying to forecast price movement trends, reading the latest news, and using his/her best judgement and “gut feeling”, the trader decides to choose the “UP” option. Once he hits “Buy” or “Submit”, the platform registers the price at which the trader “entered” the trade. Let’s say the price was $91.5 per barrel, and the entry time was 10:15 AM.

The trader can either wait, or look for other trades, if he or she still has funds in his/her trading account (because the $30 for the crude trade has already been deducted from the available trading balance).

Now let’s fast forward to 11:00 AM. It’s the time when the BO trade expires. If the price was above 91.5, say 91.51, or more, then the transaction is said to be “In the Money”, and the trader would gain a percentage on top of the original $30. That percentage ranges between 70% and 85%. Let’s use 80%. This means: 30 *1.8 = $54, would be returned to the trader’s BO account balance, with a net profit of $24.

On the other hand, if the price was below the entry price at the expiration (11:00 AM in our example), say 91.49, or less, the transaction is said to be “Out of the Money”. The trader would lose the trading deposit ($30), but some platforms return between 5% to 15% to the account balance. If the trader had started with a balance of $100, he or she would end up with $74.5 (assuming the returned percentage was 15%).

In rare cases, the transaction expires “At the Money”, which is exactly $91.5. In that case, the trader gets back the $30, without any gain or loss.

From the above example, we can see why this kind of short-term investment is called binary. Because it has only two possible outcomes at the expiry of the trading transaction.

BO trading is stressful. Although the potential of making huge returns rapidly is obviously there, so many traders lose all their capital, especially when they get emotional, and try to retaliate, by investing even more to recover their loses.

There is also a factor of luck, and another of speculation here. That’s why experienced traders enter several transactions simultaneously, with the hope that more than half of the trades would end in the money.

Another aspect of BO trading is its heavy reliance on technical analysis. If you lack that skill, the process becomes closer to gambling than trading.

Most, if not all, BO platforms require a minimum deposit of $100, or more, just to start trading (this is different from the amount required per trade). They also run strict verification procedures, before a trader can withdraw any profits, especially if the platform was regulated.

Before engaging in this risky investment, you should research the provider (the BO platform) extensively. Read the FAQ. Evaluate your technical analysis capability, and only use money which you’re prepared to lose! Never use your milk or bread money…

I strongly suggest that if you’re a novice trader, you should steer away from BO trading.

All the best,

The Wealth Maker

Day Trading


The reason I’m writing about day trading, although it contradicts the basics of what we’ve been covering so far, is to give the reader an idea about something that’s out there. An investment instrument that has been around for quite some time. It sheds more clarity on the original topic when you talk about its opposite.

So what is day trading?

A day-trader, as the name implies, starts and finishes his or her trades within one market day. An NYSE market day, for example, starts with the market bell at 9:30 AM EST, and closes at 4:00 PM EST.

A day-trader relies on the minor changes in stock prices throughout the trading day. In other words, he/she rides the fluctuation waves of share prices.

Let’s take an example. Suppose the day-trader got information that RIM is going to fluctuate a lot today. The expected scope of fluctuation is $2. So RIM’s share price will hover, say around 58-60 (remember, this is still a pure speculation, the price might take a different course altogether).

If the trader wants to ride the wave downward, he/she speculates that the price will go down from the time he/she buys the share. If the trader wants to ride the wave upward, he/she speculates that the price will go up from the time he/she buys the share.

Let’s, for the sake of explanation, say that RIM’s share price was 58.5 at 10:00 AM. The trader “expects” the price to go up, so he/she buys a 1000 shares based on that expectation. If the stock makes it up, and reaches, say, 58.7, the trader can sell the 1000 shares and make $200 profit. If, on the other hand, Mr. Market was in a bad mood that day, and wanted to punish RIM for some reason, and slams the price down to 56.87, oops, the day-trader has just lost $1,630 in less than an hour! Of course if he/she was nervous enough to sell.

Here comes the difference between a day-trader, and a value trader. For the latter, that drop in price is only a reflection of Mr. Market’s mood changes, and it means nothing next year, or even next month. The fundamentals upon which the value trader had made the decision to buy RIM (if he did) should still hold.

In conclusion: Even if a day-trader beats the market in a few trades, most of the time, at the end of the trading day, the house wins. This kind of business takes patience, discipline and a long-range view. Fighting Mr. Market on a daily basis, expecting big profits by riding price waves, reflects a micro-view, and ends in a lot of wounds..

I should also mention that day-trading is not restricted to the stock market. It could be done in a variety of markets like energy, metals, commodities, etc. Usually it’s referred to as future trading.

Till the next article, never lose money 🙂