The following is a guest blog post:
Investopedia said sometime in August that it saw a six-fold week-over-week increase in the page views of an article on how to trade binary options in the US. The translation of this is that an increasing number of folks in the investment-sphere are interested in binary options.
The reasons Investopedia gave included a 17-year-old Briton who made it big trading binary options. He now drives in a “gold-slathered” Bentley – at least as of the time Investopedia reported the story. The financial education site also attribute the spike in pageview to the ban that Belgium imposed on binary options, citing bellicose marketing, lack of correlation with the real-world economy and excessive risk as reasons.
For one, that a 17-year-old made it big trading binary options sends out a false message of it being a get rich quick scheme. And as with anything “get-rich-quick,” the “real-world” investment community seems to be against it, as highlighted by the ban imposed by Belgium.
However, investors cut binary options some slack and look at the bright side of this financial instrument that’s increasing in popularity. Because let’s face it, regardless of how “responsible” a financial instrument is, if abused, it poses high level of risk.
For instance, stock investing is widely accepted as a responsible way of investing. However, when flipped to day trading of stocks, scads of controversies ensue, because of the enormous loss it could bring. Still, there are a handful of stocks traders who do it right. As proof, one of Timothy Sykes’ successful students once advised that traders should learn when to cut their losses. In essence, there has to be a “right” way of trading binary options. Let’s briefly visit the tenets of binary options to see how to trade it correctly.
At its core, binary options are yes or no propositions regarding the direction that the price of certain underlying assets will move. A binary option platform would typically propose a trade for if the price of, say, crude oil will be below or above certain level at a given time. A trader would then choose to either trade a call or put option based on that. Obviously, saying yes, the price of crude oil will be above that level would be a call option. The reserve is the case for put option. The underlying asset could be any other commodity – gold, silver, coffee, corn, etc. Other underlying assets include indices, forex and stocks.
Fundamentally, to make an educated guess regarding the direction the price of an underlying asset, one needs to have an in-depth understanding of the major factors that affect the price of that asset. For instance, someone who understands the crude oil market would know that news of a futile OPEC meeting on production cut would be negative for the price of oil. Locking a put option based on such news shouldn’t be seen as excessive risk, since there’s an underlying knowledge. The fact that there’s a maximum amount with which one can trade on each call or put even reduces the risk.
Therefore, as long as one takes time to learn all that need be known about binary options, while also following the basic principles of investing, trading binary options can be used as a diversification tool which should be a good thing over the long-term.