- Ryan Mallory
For traders everywhere there are profits to be made in stock options trading as well as traditional stock trading, so learning how to trade stocks with binary options could be a profitable route to pursue.
So what is the difference?
Firstly, in traditional stock trading the investor buys a share or stock off the company, traditionally via a floor trading firm, although this is generally done online nowadays. Investors have to use a broker who will then close the deal and deliver the shares to the investor at the agreed price.
For binary options trading, the appeal is in the movement of the share price rather than owning a share of the company being traded. In this case no investment broker is needed and binary options trading can also be done easily online.
Essentially, the investor is trading in a type of option which has one of two outcomes: either the price of the asset will increase or it will fall. The trader will either buy - 'call' - or they will sell - 'put'.
Profitable opportunities in stock options trading
There are profitable opportunities in both stock options trading and traditional stock trading, however traders new to the market should be aware there are different characteristics, terminology and strategies to consider for options trading.
As with a binary trade in stocks and shares, a trader will call a stock option or put depending on how the market is moving. An option trade is versatile, you can adapt to the situation of the market. Essentially you are not buying actual stock, but instead betting on the direction of a market or index.
To trade in options, a trader will need to have an account with an options brokerage and it is the broker who executes the trader's options trades. Again many traders use the internet to carry out their trades via a brokerage.
This opportunity of stock options trading then takes us into the world of over-the-counter options – also called OTC - and the name comes from when options were generally bought 'over-the-counter' from a bank.
OTC option contracts
Trading in stock options brings a broader range of opportunity since OTC option contracts can be dealings in equity securities that are listed, or even unlisted, on investment exchanges.
This means that the contract is a bespoke arrangement between the buyer and seller with the contract being taken 'off-exchange' which means it is not subject to the investment exchange's rules.
This is an important element to consider since exchange listed traded options have a standard contract so the parties involved know the contract size and the option period. Whereas the OTC contract is more flexible and tailored to suit the needs of those doing the trade.
While the potential for making big profits from OTC trades is huge there's also a big chance that the trade may be costly.
For this reason, famous investment guru Warren Buffett says that these unchecked derivatives are effectively 'weapons of mass destruction' since they can wipe-out trading firms should the other party default on the agreement.
The Chicago Board Options Exchange (CBOE)
For anyone who is keenly interested in the potential profits from binary option trades in stock options, then the largest options exchange in the world is the Chicago Board Options Exchange (CBOE). The binary options trader should regularly monitor the site for trades of options - their website delivers a wide range of helpful trading information and tools, and they highlight that binary options can be traded in an approved securities account.
Also, if the trader hears the term 'See-bo' this platform is what is being referred to and options contracts for interest rates, indexes and equities can be traded here.
Essentially, for binary options traders the potential for profits is huge because there are more risks associated with the trades. However, for those who take time to learn how the stock options market works, then it could provide an avenue for income generation.