Trading in financial markets is gaining more and more popularity every day, and many Internet users see it as an opportunity for additional income. Beginner traders are increasingly attracted to binary options trading. This type of trade allows you to receive a predetermined income on time, which the trader chooses on his own.
The American option in comparison with other types of binary contracts is in great demand among speculators. In order to profitably trade in financial markets, you must be able to choose the right direction for opening a digital contract, know the laws and rules of trading, observe and minimize possible risks. And also when choosing an option, you need to consider its features.
Option Definition
For trading on financial markets, various tools are used: stocks and securities, currency pairs, gold, oil, cryptocurrency, indices and other assets, among which are binary contracts.
An option is a specialized contract on the basis of which the buyer acquires the rights to sell or purchase any trading asset without any obligations in a certain time period. Any binary contact has an expiration time, that is, the duration of the contract. In fact, in trading there are no purchases and sales. The trader makes money on the forecast of changes in market quotes for the selected instrument.
Concept of binary contract
To understand what a binary contract is, the article will give an example with an American option for clarity. Before choosing a trading asset, it is necessary to evaluate not only the advantages of the instrument, but also its disadvantages.
Pros:
- The term of the contract, that is, the expiration time, is clearly indicated in the conditions of the purchase of the option and is set at the choice of the trader.
- The profitability that the trader will receive in case of positive results of the transaction is known in advance before purchasing the contract.
Minuses:
- The difficulty of predicting when choosing a short expiration time.
- Some brokerage companies have restrictions on the simultaneous purchase of a large number of options, and therefore, in case of unsuccessful trading, it is impossible to use the hedging method.
Not every broker allows customers to open transactions in different directions until the expiration of the purchased contract expires. Most of them set limits, which is not always convenient, especially if traders trade Turbo options.
When choosing an asset, it is necessary to consider its profitability. The fact is that at different times of the day it can vary depending on the volatility of the instrument. If we consider the American option, then under the terms of the contract, the yield is known in advance, so you just need to choose the hours to trade when it will have the highest values.
Binary contract example
A digital option is one of the simplest and most understandable tools. To make money on it, you need to perform just a few actions:
- Choose a trading asset, taking into account current profitability.
- Set the expiration time.
- Choose the amount of the bid for investing.
- After forecasting the market movement, you need to choose the direction for opening a binary option and buy a contract.
Each contract has the following parameters:
- The name of the trading asset.
- Expiration time.
- The amount of the bet.
- The choice of direction for the purchase of the contract.
Predicting market prices is of primary importance to earnings. For example, buying the option “higher” implies that quotes will increase at the end of the expiration time. "Lower" - will decrease in value.
Types of contracts
The choice of a trading instrument is one of the main parameters for earning in the financial markets. Beginner traders often face various problems when choosing an asset. Therefore, it is very important to learn how to correctly assess the market situation tools for trading.
Division of options into groups:
- purchase and sale agreements;
- urgency and expiration period;
- on trading assets.
To understand what tools are suitable for a trader, American, European or Asian options, you need to know their characteristics, parameters and features.
It should be noted that all contracts, depending on the expiration time, are divided into three types:
- European options - expire after the expiration time.
- Asian contracts - the price at the time of purchase of the derivative is unknown and is calculated at the average cost of the asset until the expiration date.
- American options - have no restrictions and are exercised at any time before the expiration of the transaction.
Varieties of asset options
When choosing a trading asset, it is also necessary to consider that all contracts are divided into categories by instruments. That is, options can be used in various markets: Forex (currency pairs), on stock markets, cryptocurrency exchanges, and in trading in commodity and raw material assets.
Distribution of options on underlying assets:
- Currency agreement.
- Stock contract.
- Commodity Option.
- Interest agreement.
Before you start trading options, you must carefully familiarize yourself with the parameters and features of each instrument.
American treaty
This type of options is the most popular tool among traders. To use it in trading, you need to know what it is. An American option grants the holder the right to buy or sell any underlying asset, without any obligation, at a price agreed upon in the terms of the contract, at any time before its expiration. Such a tool is great for beginners, as it is the most simple and understandable type of options. Demand for American Option among traders is quite high, and therefore it is in almost any brokerage company.
Experts and experts have developed many different trading strategies that are great for American contacts. The trading methods are based on a wide variety of tools: technical indicators, graphical constructions, and automated programs have been created for trading this tool.
American option: myths and reality
Among novice traders, there is an opinion that making binary contracts is generally unrealistic and impossible. However, statistics clearly show that options really work, but only if the necessary conditions are met.
Professionals advise beginners to carefully study and analyze market movements, familiarize themselves with the tools and choose the right ones for themselves, before starting trading, and only then start trading.