Binary options for Beginers

Discussion in 'Educational Resources' started by harrybear, Jul 28, 2008.

  1. Binary options are good for beginners that want to get their feet wet, without worrying too much about all the jargon used in trading stocks. With binary options you either win or lose – there is no in between. The basic concept is that you buy a contract, either in the buy or sell mode and if the stock does as you predict you will receive money and if you were wrong, you lose it all.

    Of course, this can still be quite confusing. Binary options are not available with each and every stock out there. A matter of fact, it can be hard to find the ones that offer this option.

    The CBOE lists two stocks with binary options - VIX and SPX. The American Stock Exchange lists stocks with binary option as FRO and include Apple, Inc (AAPL), Cisco Systems, Inc (CSCO), Citigroup Inc (C), DIAMONDS (DIA), General Electric (GE), Goldman Sachs (GS), Google Inc CL.A (GOOG), Home Depot (HD), IBM (IBM), Intel (INTC), iShares MSCI Emerging Markets (EEM), iShares Russell 2000 Index Fund (IWM), JP Morgan Chase (JPM), Microsoft CORP (MSFT), Oil Service HOLDRS (OIH), PowerShares QQQ (QQQQ), SPDR S&P 500 (SPY), Select Sector SPDR-Energy (XLE), Select Sector SPDR-Financial (XLF) and Wachovia Corp (WB). Every stock exchange has their own binary options, so you will have to learn which ones are available with this type of option or listed as FRO’s.

    Now, to explain the concept. Binary options give investors a wide variety of trading options in that some are short-term trades while others may be quarterly since they are based on the date of expiration. You as a binary option trader will choose the stock that you wish to buy or sell by if you believe the price will go up or down on the date of expiration. If you think the market price is going to be higher then you buy. If you believe the market price will go down then you sell. If you choose correctly, then you receive payoff on each contract you had on that stock.

    Normally, the price you will receive is a fixed amount, such as $100. This means you will receive $100 for each correct contract. If you buy and spend $25 and the stock rises or are equal to the strike price on expiration, you will receive $100 for each contract. However, if you are not correct you will lose your investment all together.

    Metals and energy can also be bought and sold with binary options and be watched through the New York Mercantile Exchange. With the economy the way it has been heading, many investors are buying and selling foreign currency with the hopes of making a quick buck while others are looking to natural gas or crude oil.

    Example of buying a stock with binary options

    Light Sweet Crude Oil (CL)
    The strike price for buying (calls) is at 20000
    The strike price for selling (puts) is at 8000

    Looking at the market and the strike prices you can make an educated decision in which way you believe the stock will go. Let’s say you buy. The last strike price for calls was at 15000 and now it is at 20000. When you buy in you are saying the price of light sweet crude oil will be at 2000 or more on the date of expiration. If you are correct, you will then receive the set amount of money, usually $100, per contract.

    Example of selling a stock with binary options

    If you put on light sweet crude oil, believing the strike price of 8000 will be that or less then you will receive $100 per contract if the set amount is such.

    However, in both scenarios if you are incorrect and the strike price goes down with a call or up with a put then you will lose all money invested.

    Example of buying or selling a stock with binary options long term

    You can also call and put with stocks that do not have an expiration, except quarterly. This allows you a few more options. You can always change your mind, however, you will only receive the money you put into the stock.

    If you have a contract for Gold in the amount of $80 but now you do not believe the price will be the same or more, you have the option of selling. Of course, you will sell at a loss, but you will not lose your entire $80.

    However, if you leave it the same and you were correct in your speculation, you will receive the set amount of money per contract.

    You need to watch the binary option price the stock is selling at. This can be a great way to make an educated decision if the stock with rise or plummet on the expiration dates.
  2. This guy did a good job of explaining binary options. :)

    Speculative Trading with Binary Options
    By Kurt Eckhardt |

    I own Al Gore.

    I don't mean I own Gore figuratively as on the basketball court but rather I own Al Gore literally. I'm long Al Gore for President on Intrade. Now please don't take this as a political endorsement. I'm probably best described as a libertarian Republican. To someone like me who trades professionally and also ran for Congress a few years back, Intrade is a marriage made in heaven. Even if you have little interest in trading on political events Intrade is an excellent forum to learn how to price binary options.

    Intrade is an exchange based in Dublin. Although Intrade is legally recognized in Ireland it's legality with U.S. citizens is murky. However since the CFTC has allowed the University of Iowa to also list an election market and because Intrade didn't stop me from opening an account even after realizing I'm an over regulated American, it's possible that Intrade might pass muster with the DOJ.

    If my future bylines are from Federal penal institutions in Leavenworth or Talladega then perhaps you should shelve the idea of opening your own Intrade account.

    Intrade is best known to American handicappers by it's sister site, Tradesports. Founded in 2000 Tradesports is regaled for offering two sided binary markets on sporting events. Intrade specializes in Prediction Markets ranging from election results to hurricane forecasts.

    Unlike a traditional bookmaker where one trades against the house, speculators on Tradesports and Intrade trade directly with other participants in the same manner one would trade on any other futures or options exchange. In fact Intrades order entry system is a DOM price ladder resembling a poor man's version of Trading Technologies X-Trader.

    A binary option is an option type that at expiration either pays off a fixed amount or nothing at all. Let's say XYZ is trading at 95 and the 100 binary call option is offered at $2 with a fixed payoff of $10 if the stock closes above the 100 strike. Below 100 at expiration you lose your entire $2 and above 100 at expiration you make $10. Simple. One or the other. The option pricing model is merely the odds of whether XYZ will close above the 100 strike or not.

    A typical vanilla options model assumes the smallest payout is just above the strike while a binary pays off equal no matter how much it closes in the money. Also, because a binary waits until expiration to pay out it's full 100% a binary views time decay much differently than a vanilla call.

    As you know the value of an ITM option is the sum of it's intrinsic (price above the strike) and extrinsic (time) premium. In a hypothetical no cost of carry basis the extrinsic value of an ITM call should be of equal price to the same strike/expiration OTM put. An example:

    Thus a normal call option enjoys it's greatest relative value when it has the most time left. A binary is the exact opposite. Which of the following outcomes is more certain? If XYZ is 105 today it'll be greater than 100 one year from now or if XYZ is 105 today it will be greater than 100 tomorrow? Clearly we have a higher expectation of XYZ being above 100 with just a day left than with an entire year in front of us.

    Hence with XYZ at 105 a binary 100 call expiring tomorrow would be trading at virtually a 100% chance of being above it's 100 strike and the 100 call a year out might only be priced at a 60% chance.

    While binary options are offered on many OTC currency and fixed income platforms the only exchange traded binary contract is on the CBOT's Fed Funds contract. A binary option trades at prices between 0 and 100. The auction traded "price" is essentially then the percentage chance of the full payoff being achieved at expiration.

    A price of 5 on a binary option means simply that participants collectively believe there's a 5% chance of the binary closing in the money at full payoff. In the future U.S. Exchanges will continue to expand the development and listing of binaries. Even if you don't open an account on Intrade or Tradesports, gaining knowledge of how binary options operate in real world environments will give one unique insight in assessing market probabilities.

    As far as my Al Gore trade; not looking so good. I paid between $0.40 and $0.50 (for a $10.00 payoff) and Gore is now offered at under $0.10 and he's probably on his way to zero.

    Figuratively speaking of course.

    Kurt J. Eckhardt has been trading since 1982 when he began his career as an active floor trader in the CBOT Treasury Bond pit. Kurt is President of Eckhardt Research and Trading and its subsidiary Agility Trading. Agility offers both individuals and funds cutting edge technical strategies along with high performance instruction. For more information go to or email Kurt at
  3. yeah al gore probably wasnt a good investment
    5 years back it was but now.....
  4. what are the best binary options brokers out there?
  5. expiated


    In a couple of weeks, assuming he has everything in place, I plan to be working with a partner I have in Estonia to explore whether some configuration of system pictured below and to the right can be exploited profitably when it comes to binary options.

    ScreenHunter_7475 Apr. 02 12.05.jpg

    He will essentially be trading my money for a week based on the information I provide. At the end of the week he can keep whatever is left of the money, if anything, and decide if he wishes to stop or continue working together.

    If he opts for the latter, we will have to reach an agreement on fair compensation for the education and information I continue to provide.

    Right now I’m finalizing how much time the typical trade should be allowed to be sure it arrives at expiry on the “in-the-money” side of the strike price.

    At this point I’m thinking it will probably be a minimum of 90 minutes, but I’ll have to wait to see how everything pans out before I’m sure.
  6. expiated


    Using the following chart setup and its accompanying strategy, I anticipate recommending each trade’s expiry typically be set at 10 minutes rather than 90.


    I prepared a spreadsheet to give me an idea of how quickly an opening balance of $10.00 deposited in a MarketsWorld binary option trading account could be parlayed into a $500 account if every single trade were successful, which I obviously do not expect in real life.

    When I was trading binary options using the MarketsWorld platform in 2014, the return on investment (ROI) for in-the-money Forex contracts typically varied between 72% to 83%, so I used a conservative 70% ROI for my calculations.

    I used an initial stake amount of $1.00, and then added $1.00 every time the account balance grew by an additional $10.00.

    ScreenHunter_7505 Apr. 07 08.20.jpg

    I noticed the European version of the MarketWorld’s platform, if I’m not mistaken, represents stake amounts in the form of ¢100, rather than $1.00. I therefore assume this would entail using an initial stake amount of ¢100, and then adding another ¢100 every time the account balance grows by an additional $10.00.

    Using such a plan, it appears to me that it would take approximately 66 trades to grow the initial balance of $10.00 to $500 if a trader were able to avoid placing a single out-of-the-money order. So then, 13 successful trades per day would just about do the trick in a matter of a single week.

    I therefore plan to use this as the benchmark against which I will measure the actual performance as it unfolds once this project begins sometime after mid April, 2018.
    Last edited: Apr 7, 2018
  7. expiated


    I was taking a nap during the first couple of hours when the market opened this week and missed all of the best trade setups so far. I therefore had to use this setup of the “second order” to begin testing my theories on trading binary options. It was based on a reversal in the bias or sentiment line, which I will explain in a minute.

    (I have to “pad” my short positions with extra room due to the imprecision of the MT4 platform I use, which will stop me out of short positions even though price is nowhere near the stop-loss levels I set.)

    ScreenHunter_7514 Apr. 08 18.51.jpg

    In this case, it turns out that setting expiry at ten minutes in the future would indeed have led to an in-the-money payout.

    ScreenHunter_7515 Apr. 08 18.51.jpg

    Again, my B.A.T. Guerrilla Trading System is, in part, all about relationships, with a confluence of moving averages (and/or lower panel oscillators) being one of the main occurrences I watch for. However, they must occur at one of the three levels of deviation, with the first level represented by thick red horizontal lines, the second level represented by the dotted teal horizontal lines, and the third level represented by wide washed-out-sea-green horizontal lines. (Obviously, the greater the amount of deviation, the greater the probability the exchange rate will soon manifest an intraday reversal.)

    ScreenHunter_7516 Apr. 08 18.57.jpg
    One of the main things I’m looking for is a “triple-spike” at any of these three levels, but the violet red oscillator is the most important one and MUST be the main factor in any decision to execute a trade.

    If the slope of the (thick black) bias line in the main chart and/or lower panel is too steep, positions are not entered, even following a triple-spike, due to the danger of trying to “catch a falling knife” and “dying the death of a thousand cuts.” In such instances, the trade is executed when the reversal is confirmed by a hook in the bias line, as observed twice at Example B.

    Examples A and D are acceptable trades because the slope of the bias line is not as pronounced (though Example D is kind of iffy). Other spikes were ignored because the violet red oscillator was not involved. Example C is acceptable because even though there was no confluence of multiple oscillators, simply because the violet red oscillator was forming troughs while the bias line was climbing! You have to evaluate how the moving averages (trend lines), average price ranges (moving average envelopes), market structure, and typical price patterns are all relating to one another!!!

    Example E is an acceptable trade because the violet red oscillator is not spiking, but rather, is rolling over, minimizing the danger of encountering a falling knife, though it is of course always safer to wait for confirmation from a hook in the black bias line moving average/oscillator.
  8. expiated


    This trade was executed at about 3:30 a.m. local time (Los Angeles) based on the rate/price rising above the bias line in the main chart. (The bias line in the lower panel can sometimes be deceiving.)

    ScreenHunter_7521 Apr. 09 04.15.jpg

    It took the pair approximately 25 minutes to rise above the would-be strike price with a minimum amount of conviction or finality...

    ScreenHunter_7522 Apr. 09 04.15.jpg
  9. expiated


    I shorted this pair when price stopped making progress.

    ScreenHunter_7531 Apr. 09 08.32.jpg
    For this trade, 10 minutes until expiry would have sufficed...
    ScreenHunter_7533 Apr. 09 08.33.jpg
    My rationale for executing the above trade (other than going 18 minutes without making any additional progress):

    ScreenHunter_7530 Apr. 09 08.22.jpg …first level of what I call “statistical” resistance.
  10. expiated


    ScreenHunter_7543 Apr. 09 10.12.jpg
    #10     Apr 9, 2018