If you use the web for financial and investment information you
have probably seen some astounding advertisements promising astronomical
short term investment opportunities. Some of the more recent claims are
"up to 95% profit in one easy trade," "Earn up to 85% per trade," or
"Win up to 88% per trade." Are these types of claims accurate? Does the
world of binary options live up to the hype? We will explore this
question in this report.
What is a binary option? Perhaps it is
best to define the word 'option' first. An option is simply a financial
contract where we agree to buy or sell some sort of asset at a certain
price within a certain time frame. Options fall into the derivatives
category because such a contract has a value without actually holding
the underlying asset itself. For example, if you own an option contract
for Apple or Google, that contract has value all by itself, despite the
fact that you own no shares in the company. The mere fact that you have a
contract to buy or sell shares in the future has a value in and of
itself. Option contracts expire at some time in the future - minutes,
hours, weeks, months or even years, depending upon the particulars of
the contract. Upon expiration, an option contract becomes worthless. So
those who invest in options must do something with them, buy or sell,
sometime before they expire.
A binary option is a highly
specialized option contract which cannot be sold after purchase. This
type of option is simply held by the purchaser until it expires with a
predetermined profit or loss. The advertisements that describe a 90%
profit simply describe an option deal whereby a 90% profit (or loss)
would be generated if the underlying asset performs in the manner that
you predict. For example, let's say the Dow Jones Industrial Average
opens up at 16,501. You think it will close higher by the market close.
So you decide to purchase a $500 call (upward price expectation) option
with an end of day expiration. The day grinds to a close with the Dow
closing up one point at 16,502. Your option contract appreciates in
value by 90%. Thus, your $500 appreciates to $950. If the DOW closes
down, you lose the contract and will lose most of your $500. Some
brokers will give you back 15% on losses. But this type of option is
binary in nature, meaning you will either win or lose at the time of
expiration. Some have described this type of option like throwing money
on red or black at a casino. This is a fair description. Yet most option
investors would like to believe they are much more skilled than
gamblers who play the casinos.
Binary options have been around for
years as private over-the-counter deals. These exotic options were
first introduced to the general public in 2008, when the brokers started
offering the deals online. Today there are dozens of brokers who
specialize in these exotic options. Most of these are located offshore
in places like Cyprus and the British Virgin Islands.
Are binary
options legal? Like most legal subject areas, the answer is not simple.
Most of the binary options brokers operate in locations outside of the
jurisdiction of securities regulators. Some of them operate under casino
gaming licenses. There is now a CySEC (Cyprus Security and Exchange
Commission) which is attempting to regulate the industry for those
brokers within that jurisdiction. In the United States there is a
relatively new broker called NADEX (North American Derivative Exchange).
This firm is fully regulated by the Commodities and Futures Trading
Commission, a US government agency similar to the Securities and
Exchange Commission. Binary option investing is so new that it will take
some time to see how the regulatory environment actually pans out.
Certainly it is fair to say that the legal trend is toward fully
regulated firms which offer exotic option investment opportunities to
eager clients within any jurisdiction.
Before we look at the
upside of binary options let's take a look at the downside. Exotic
option investing is not traditional investing. Some say it is very
similar to gambling. I like the red/black roulette wheel analogy. When
you acquire a binary option contract it will either win or lose at some
point in time, depending upon the expiration time of the deal. Many of
the option brokers now promote 60 second contracts. A fair assessment
would be to call such a contract an investment/gambling hybrid. In fact,
it could be argued that any Wall Street investment is really nothing
more than an elaborate gambling scheme.
Unlike traditional option
deals, where each contract controls a certain number of shares, there is
no leverage with binary options. With this type of option you cannot
exercise the options. Thus you have no right to the underlying asset.
The option is strictly used to generate income for the holder.
There
is no liquidity with binary options. There is no marketplace to sell
these unexpired contracts. Once you purchase the contract you are in for
the duration. Some brokerage firms are starting to experiment with
liquidity, offering to either buy back certain of the contracts under
certain conditions or find buyers willing to take over unexpired
contracts. It will be interesting to see how the industry evolves in
terms of such an after-market.
Another downside for binary options
has to do with the losses. To truly make money in the long run you have
to be a skilled investor with high win to loss ratio. Because when you
lose with these options, you lose really big, upwards of 90%. Some
brokers are now returning 5% to 15% on the losses. This is probably just
a marketing ploy to get you to stick with them. But depending upon the
size of your account and the size of your trades it could help with
another trade.
Unfortunately the mainstream financial press
doesn't have much to say about the field of binary contracts. Dr. Jon
Najarian, a host of the CNBC television program "Fast Money," calls
binaries "training wheels" for getting involved in traditional options.
Najarian says that binary options will have wide appeal to "individual
investors, hedge funds and institutions, who have an opinion, one way or
another, on future price movements." An article entitled "Don't Gamble
on Binary Options" appeared in Forbes magazine in 2010. Gordon Pope, the
author, spent two pages convincing the readers to stay away from binary
options. He closes the article out by stating that "If people want to
gamble that is their choice. But let's not confuse that with investing.
Binary options are a crapshoot, plain and simple." It is unfortunate
that Pope places binary options in such a negative light. He fails to
mention that virtually all types of investments are a crapshoot.
Now
we will discuss some of the pros of binary options trading. First of
all, these options are an excellent and simple way to get exposure to
various markets - stocks, commodities, Forex and the like. Binary
options truly make it possible for anyone to trade markets. Some of the
brokers will even open accounts with $100 and let you experiment with
$10 deals. Again, this paves the way for almost anyone to get involved.
Trading
binary options is an excellent way to test various trading strategies
without risking large amounts of money. This type of option account can
be opened up in minutes and does not require long questionnaires,
approval and cumbersome procedures like with a conventional options
account. Most of the brokers accept credit cards as well as your
favorite online payment method. Wire transfers with your bank are also
available. Because most of these option firms are located offshore,
opening up an account in one of these locations is a simple way to set
up funds offshore.
The most obvious benefit of investing in binary
options is the huge upside potential. Where else can you get returns of
+80% in such a short period of time? So, do binary options live up to
the hype? The answer to that question depends upon how they are used and
how successful a particular binary option investor is. Of course the
underlying market conditions also play a large role in whether a
particular binary option contract is profitable or not. The bottom line
is that binary options can be a very profitable investment vehicle for
short term profits.
Options can be very rewarding to traders who know what they are doing.For anyone who wants to start option trading. Click on the link below and get help from an expert.
Binary Options Trading Signals Live!
http://tinyurl.com/932ta3y
Daryn Fleming, Ph.D., is an entrepreneur with 20 years'
experience in stock market investing.http://www.Wallstreetwest.com
Article Source:
http://EzineArticles.com/?expert=Daryn_Fleming,_Ph.D
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