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?