Options Pros Talk Put-Call Parity and More This rebroadcast of OICs webinar panel on Put-Call Parity...
The Ins and Outs of Binary Options
01/14/2013 12:33 pm EST
There are two primary ways to trade binary options, says Noble DraKoln, who reviews the key factors that traders need to understand.
My guest today is Noble DraKoln, and we're talking about binary options and the various ways to trade those, so Noble, give us an idea of the different ways you can trade binary options.
Well, binary options are kind of a new thing going on right now; there's over-the-counter binary options and there's exchange traded binary options, and there's a big difference between the two even though they cover the exact same concept, so there's a lot of ways to trade them.
All right; what's the difference. Do I pay more for one of them, or liquidity; talk about that.
Okay, so right now you have Nadex; they started the exchange traded over-the-counter, binary options are a little bit different from that. Nadex lets you get started with $100. With the over-the-counter you might have to start with a couple hundred dollars, and it's not here in the United States; it's usually in Europe where it's actually regulated and licensed. Right now it's not licensed in the US, so over-the-counter is just a little bit different, but they function similar. When you talked about liquidity, Nadex has a lot less liquidity.
Less liquidity. All right, let's talk about an instance where you would use binary options. Can you give me kind of a generic example of when binary options trading would be a good one to use?
Okay, so binary options were also called digital options because they're a yes/no concept, so I believe that the price is going to be $1700 yes, or no, and so let's say if you want to get involved with gold, but you don't really want to get stuck doing technical analysis, and you don't think it's going to get over $1700 by the end of the day, you can just say okay, yes, I believe it will or no, I believe it won't, and then you'll get paid when it does or doesn't.
All right, so either way, either lose the entire $100, or make $200 or whatever it may be?
Well, so this is how it goes. Sometimes you don't put up all the money. You may put up $5 or $10 in the over-the-counter market or in Nadex case, you pay a difference; it's an offset between the buyers and sellers, and so you don't lose all of your $100, but when you do make the trade, it is an all or nothing bet, so you put all your money down, just like at auction, and you're guaranteed to win sometimes up to 70% to 85% if you're right, but it doesn't have to move 70% or 80%, it only has to move one tick, one pip, one cent in order for it to be worthwhile.
All right, so interesting, so is it a way that I can actually do this every day or do they expire every week or is it like regular options that way?
Okay, so when you get involved with regular options on the futures market or even in the stocks they have set timeframes; it's usually like a month or three months. In the binary option world you can actually, for instance on Nadex it's by the end of the day, so 3:00 pm it expires, but in the over-the-counter market there's a couple cool different ways you can do it. They have it as low as 60 seconds in which you can execute an option, have 60 seconds to see it play out and then get paid within the 60 seconds.
Wow. All right, and one of the things I heard is there's limited loss. I know my maximum loss for every trade, which is nice.
Exactly, and in fact, because in the OTC or the over-the-counter market you can actually dictate exactly what that minimum loss will be, so if its $10 you want to put in, in order to earn $7, then you only put up $10 and that's the max you can lose. If it's $20, etc. In the Nadex, it's a little bit different. It's a specific amount, so they'll show you on the screen you could potentially lose, but it is only specific to your investment just like standard options.
Sounds like it could be pretty attractive if somebody's getting started, has maybe a smaller account, they can use a smaller amount of money to get involved in the markets.
You know what, people say for smaller accounts, but it's also for people who have big accounts who just have the experience of knowing that they're not experts and they're not perfect at deciding all the technical analysis. It just makes it a better and simpler trade for them.
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