Binary options Tips
Tips
- Know the underlying asset - Binary Options derive their financial
value from underlying assets.Before investing in a Binary Options, make
sure you understand the underlying asset, are familiar with the relevant
financial markets and where the asset is traded. Example: Silver
Futures are listed on NYMEX/COMEX.
- Know how to interpret a Binary Option price - The price at which a
Binary Option is trading is an indicator of the chances of the contract
ending in-the-money or out-of-the-money.
- Know when to get out of a position - An intuitive trader acts
promptly when he feels that his binary contract is going to end
out-of-the-money at expiration. Example: You have a $75.00 Silver
contract that you feel is not going to expire in-of-the-money. Instead
of holding it until expiry, selling it at $30.00 and neutralizing your
open interest will help you manage the loss (i.e. $45.00 instead of
$75.00).
- Understand the relationship between risk and reward - Risk and
reward go hand-in-hand in binary option trading. The more the risk or
unlikelihood of a particular outcome occurring, the greater the reward
associated with it. An intelligent investor understands and weighs each
contract on these two matrices before taking a position in a contract.
As an example, an investor who follows foreign currency movements senses
that the USD is gaining ground against the YEN and wants to hedge his
risk and try to protect his Japanese investment from dropping in value.
He may do this by buying 10,000 binary contracts on HedgeStreet, which
are “USD/YEN rate will be above 119.50” by 4:00 PM ET tomorrow. If his
analysis is correct and the USD gains ground over the Yen, rising above
119.50, the 10,000 binary contracts will expire in-the-money, yielding a
total payout of $1,000,000. If he paid $75 per contract, he will make
$25 per contract, which is a $250,000 total profit - a 33% rate of
return on his investment. However, if the Yen did not end above 119.50,
the 10,000 binary contracts will expire out-of-the-money. In this case,
the trader would lose his initial investment on the binaries, but would
be compensated by the gain in value in his Japanese investments.
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thanks for valuable tips.
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