Welcome to Binary Trading for Beginners in a Hurry, where I will uncover the powerful strategies used by traders to multiply their profits and protect against losses. We’re going to do it quickly, and we’re going to cover the most important topics that you need to understand as a beginner options trader. Let’s start by defining what options are. You can trade options using the same brokerage platforms that you use to buy and sell stocks.

Binary Trading Call Options

Call options give the owner the right to buy an underlying stock at a strike price before a predetermined expiration date. When traders believe that the price of a stock will surge over a specific period, they can buy call options to maximise their returns as opposed to simply buying shares of stock. NVIDIA’s stock price traded near $150 at the end of 2022. A bullish trader could have purchased call options on NVIDIA with a strike price of $150 set to expire in mid -February 2023.

A trader buying this call option would obtain the right, but not the obligation, to purchase 100 shares of NVIDIA for $150 per share before the call’s expiration date in February. As NVIDIA’s share price rocketed from $146 to $195, the $150 strike call option surged in value as the call’s ability to purchase shares for $150 became much more powerful. With the stock price at $195, traders holding the $150 call options could buy 100 shares for $150 and then sell them at the share price of $195, therefore making a $45 profit per share or $4 ,500 on 100 shares.

Concept of an Option Contract Multiplier

This is a good opportunity to understand the concept of an option contract multiplier. In the case of standard equity options such as options on Apple or Tesla, the multiplier is 100. This means that each option contract you buy gives you control over 100 shares of the underlying stock. This is why when we talk about option prices, we need to multiply the price by 100 to get the actual cost or value of the contract. For instance, if we see a call option with a price of $10 .39, this means we actually need $1 ,039 to purchase this option since its actual cost is 100 times its listed price.

I know it’s confusing, but as options traders, we just have to get used to multiplying option prices by $100 to get their cost.

If we’re able to make a $45 profit per share and each call contract allows us to purchase 100 shares at the strike price, then we would be making a $45 profit per share on 100 shares which would generate a total profit of $4 ,500. This is why when we sell this call option for a price of $45 that actually means that we collect $4 ,500 for selling the contract. The call’s price at the end of the period was $46 which is explained by the $45 profit per share that can be made by purchasing stock at the call strike price of $150 and then selling them at the market price of $195.

Therefore, options traders simply sell the contracts at higher prices to secure their profits without needing to use the option in the described transactions.Remember that call options give the owner the right but not the obligation to purchase shares at any given moment will reflect the value of this ability allowing traders to sell their options for higher prices if the call value surges above the initial purchase price. A trader who purchased the call at the initial cost of $1 ,000 could have sold the contract for $4 ,600 at the end of January therefore securing a profit of $3 ,600 from their initial $1 ,000 investment.

The key thing to note here is that you can close your options at any time. You do not have to hold them until the expiration date. So just like buying and selling shares of stock you want to buy low and sell high. When you’re trading options you want to buy the option at a low price and sell it for a higher price therefore making a profit.

Binary trading Put Option Explain

As mentioned there is a second type of Binary called put options. Put options give buyers the right but not the obligation to sell an underlying asset such as a stock at a specific price before a predetermined expiration date. When traders believe that the price of an asset such as a stock will plummet before a specific date they can buy put options to make profits from the declining stock price or if they have an existing stock position traders can buy put options to offset the losses should the stock price decline. Tesla’s stock price traded near $200 at the end of November 2022.

A trader expecting sharp stock price declines could have purchase put options on Tesla with a strike price of $190, expiring in mid -January of 2023. The put gives the buyer the right, but not the obligation, to sell 100 shares of Tesla for $190 per share before the put’s expiration date in January of 2023.

As Tesla’s share price dropped sharply from $195 to $123 in December of 2022, the $190 strike put increase in value as the put’s ability to sell shares for $190 became much more valuable. With the stock price at $123, traders holding the $190 strike put options could buy 100 shares for $123 and sell them at the strike price of $190 by using their put options, therefore making a $67 profit per share or $6 ,700 on 100 shares of stock. A trader who purchased the put at the initial cost of $1 ,500 could have sold the contract for $6 ,700 at the end of December securing a $5 ,200 profit from their initial $1 ,500 investment.

In both of the call option and put option examples, the percentage gain experienced on the option price was significantly higher than the percentage change of the stock price, which highlights why at times traders will use options as opposed to trading shares of stock. To make money trading options requires you to first understand what drives option prices and it’s not as simple as stock price direction alone.

Binary trading Put / Down Option Explain

Binary prices are driven by many factors such as the stock’s volatility. The stock price relative to the option’s strike price, and the amount of time until the option expires. Over the past year, Tesla shares have traded between $100 and $300, which is a gigantic stock price range. If we look at a 60 -day call option with a strike price of $275, we see its price is currently $27 .50 or about 10 % of the Tesla stock price. The gold ETF, GLD, has traded between $150 and $190 over the past year, a much smaller $40 range compared to Tesla’s $200 range.

The 59 -day, 180 strike call option in GLD is trading for $4 .20 or about 2 % of GLD’s stock price.The 60 -day Tesla call with a strike price equal to the stock price is trading for 10 % of the stock price, while the 60 -day GLD call with a strike price equal to the stock price is trading for 2 % of the stock price.

Basically, what this is telling us is that the stock’s volatility is a huge factor in The higher a stock’s volatility, the more expensive its options will be, because with larger expected stock price changes comes larger potential option price changes, and so those options will be more expensive compared to a lower volatility stock.

This brings us to the next important option pricing factor which is the amount of time left until expiration. To easily understand this imagine I am buying health insurance for a one day period versus a 30 day period. There’s a higher probability of me experiencing a health problem over a 30 day period compared to a one day period and because of this I will need to pay a higher premium for the 30 day insurance as compared to the one day insurance and the same concept holds true in the realm of options.

If we look at Nvidia options with four days until expiration you will notice significantly cheaper option prices compared to the previous options with more time until expiration. The likelihood of significant stock price changes increases over longer periods of time and so longer term options trade at higher prices compared to shorter term options. The key takeaway from this section is option prices reflect the probability of reaching high valuations at the time of expiration. Options on high volatility stocks may see bigger price changes than options on low volatility stocks.

Longer term options have greater chances of encountering large stock price changes than shorter term options simply because a stock has a higher probability of making a big movement over longer periods of time as compared to shorter periods of time. Since time only passes and doesn’t go backwards there’s only a few ways that options traders can make money when buying options. Number one is the stock price moving towards or ideally beyond the strike price of the option meaning an increasing stock price.

when buying calls and a plummeting stock price when buying puts. Number two is the stocks volatility increasing because an increase in the expected magnitude of stock price movements will drive option prices higher since those options now have a higher probability of encountering larger price changes due to the increase in magnitude of expected stock price movements. One or both of these must occur to offset the value losses of an option as time passes.

Risk Involved

While options are powerful tools that traders can use to magnify their returns relative to the changes seen in the stock price they also carry a much higher degree of risk as compared to trading shares of stock. It is far easier to lose all of your money when buying options as compared to buying shares of stock. On august 31st 2022 an NVIDIA options trader who purchased the October 150 calls would have seen their positions value vaporised as the shares slipped lower through the options expiration date. The share price fell 17 % but the call price fell 100%.

On the first day of 2023 a bearish Tesla trader who purchased the 100 strike put expiring in March of 2022. would have seen their positions value vaporised as the shares slipped lower through the options expiration date. The share price fell 17 % but the call price fell 100%. On the first trading day of 2023 a bearish Tesla trader who purchased the 100 strike put expiring in March of 2022. 2023 would have met a similar fate, seeing their put positions value trade quickly to zero as Tesla shares blasted into the cosmos like a Falcon 9 rocket.

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