Many investors prefer to trade stocks using binary options as an alternative to trading this asset type directly. This is because they can utilize binary options to speculate on the price movements of stocks in a similar way as if they traded the actual stock of companies directly. However, there are significant differences between trading stocks directly and using a binary option to do so.
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One of the main variances is that, in the first case, you will own part of a company after you purchase a stock whereas in the latter you will just acquire the ‘rights’ to buy or sell the stock of your chosen company at a selected price. Fundamentally, stocks are distributed by their parent firms whereas stock options are independently guaranteed by market makers and are not linked directly to their underlying companies.
You can either activate ‘put’ or ‘call’ binary options using underlying assets based on the stocks of companies. A ‘call’ selection allows you to buy stocks while you must use a ‘put’ one to sell them. The price of a stock option is called a premium. There are many benefits associated with trading in stock options instead of the stocks directly.
For example, you just need to calculate the direction in which the price of a stock will proceed before an expiry time and not its size. This attribute 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 the actual stocks of companies can produce the most complex price patterns because of the large number of influencing factors. When you trade stocks directly you need to study these attributes in depth whereas you do not have to perform such research when dealing with options.
In addition, you will always have a full knowledge of your exact risk and profit potential whenever you activate stock options. You will know that you will receive a pre-determined profit if you are in-the-money at expiry time, which can be as high as 78% of your initial deposit. Alternatively, you will know that you will receive a refund between 10% and 15% of your investment if you are out-of-the-money at expiry time.
You therefore benefit from a pre-calculated money management strategy when you trade stocks options. This is a significant advantage compared to trading stocks directly when you will have to devise your own protections in order to minimize your risk exposure.
You will profit by using ‘call’ binary options if the price of your selected stock finishes just one point above its opening value at expiry time. Conversely, you need your ‘put’ binary options to terminate at expiry time just one point below their opening prices in order to receive a pay-out. You can improve your profitability at trading stock options substantially if you learn to master trading strategies. Here are a few common ones which have provided many investors with success.
- You can combine ‘put’ and ‘call’ binary options to provide yourself with windows of opportunity to double your profits whilst minimizing your risks.For example, imagine that you have opened a ‘call’ stock option with a strike price of $20 and you are now in-the-money because it has appreciated in value to $24. However, you are worried that a price reversal could happen before your expiry time elapses.You can safe-guard your profit by initiating a ‘put’ stock option at this stage. As a result, you would have generated a window of opportunity between $20 and $24 whereby if both options close within it, you would receive a double payout.
- You can also utilize strategies that will assist you in hedging our investments. For instance, assume that you that determined that the shares of Apple will appreciate because of the launch of a new product. In addition, you conclude that this event could adversely influence the market share of rivals, such as Microsoft. Consequently, you could hedge a ‘call’ Apple option with a ‘put’ Microsoft one.
As the above examples demonstrate, stock binary options enable the use of strategies that can boost your profits at minimum risk.