Using Binary Options to Trade Stocks

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Trading Stocks

Trading stock binary options takes some understanding of how stocks behave in order to profit from it.

Stocks constitute one of the asset derivatives that can be traded on the binary options market. Usually, a trader will have access to trade hundreds of stocks, as brokers will list several stocks from the different stock exchanges across the world. A good spread will include stocks from the three American exchanges, the London stock exchange, and the stock exchanges from Germany, Spain, Switzerland, the Eurostoxx exchange (which contains stocks of companies in the Netherlands, Belgium, and other central European nations) as well as stocks from some selected middle East exchanges. This gives traders and unbelievable spectrum of stocks to change.

What Factors Should you Take into Account when Trading Stocks?

In order to trade stock binary options, traders must be conversant with the factors that cause movement in stock prices. Some of these factors are as follows:

1) Market sentiment: if there is a gloomy market sentiment and worry about the global economy, most investors will prefer to hold cash and will sell their stock holdings, leading to a fall in stock prices.

2) Earnings reports: A good or bad earnings report will cause a stock price to rise or fall respectively. What constitutes a good or bad earnings report? A company reporting a loss may look bad, but if the loss is less than a previous loss, this may be viewed in a positive light by investors, leading to increased demand and a rise in the price of this asset. Conversely, profits declared by a quoted company may not necessarily be viewed in good light, if the profits are less, or are viewed as an underperformance when compared with its peers for the period. The trader must have access to historical data to be able to use factors like earnings reports for stock binary options trading. Another limitation to the use of earnings in trading stock binary options is that they are seasonal and can only be used during the quarterly earnings season.

3) Mergers and Acquisitions: A merger or an acquisition is meant to improve the standing and competitiveness of the companies in question, and usually have a positive impact for the companies involved.

4) Government policies: these could have a positive or negative effect on stock prices. For instance, increasing import duties on raw materials for a particular industry could erode the profit margins of affected companies and negatively impact their ability to remain competitive against foreign goods. On the other hand, import duty waivers could enhance profitability of the same companies in question.

How to Trade Stock Binary Options

The first step is to identify in what direction the stock is likely to head after a news release affecting the share price of the company in question. From there, the trader is free to choose any binary options trade type to fit his trade profile. For instance, an earnings report can lead to a sustained response that lasts for many days. In such a situation, the trader can decide to trade the Touch/No Touch option, using an appropriate price barrier while taking into consideration any recent supports or resistance levels.

If there is a particularly strong news release that is likely to cause the share price of a company to spike in any direction, the trader can decide to trade any of the high-yield option varieties. For instance, the sudden announcement by the CEO of JP Morgan about the trading losses recently incurred on its positions is the kind of news release that can lead to a move so hard that it could breach the price barriers of the high-yield option types. It is ultimately up to the trader to determine what kind of trade will suit the news release he wants to trade.

Trading Stocks with Binary Options

Stocks are just one of the many types of underlying financial instruments you can trade using binary options. It’s most helpful to look at a binary option as a way of trading an asset such as a stock—you can also use it to trade currencies, commodities like gold and oil, and more. How do you trade stocks with binary options, and how does it differ from traditional stock trading and other stock option investments?

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Binary Options Versus Stocks and Stock Options
Though many people know the basics of how the stock market works, most do not know of the many options available to investors. Included in this are binary options, a higher risk but straightforward alternative to trading traditional stocks and stock options. Below we compare and contrast the similarities and differences between trading stocks and binary options.

Price: A Major Difference Factor

Stocks are priced initially based on a number of different factors including how much the corporation is worth and the number of stocks made available to be publicly traded. Thereafter the market takes control and the current stock price is based on whatever investors are willing to pay for it at that point in time.

Stock options give the investor the right to lock in these shares at the selling price for a set period of time. Essentially, it is the right to purchase stocks for that price regardless of whether the stock increases in worth during that period of time. Profit is made by purchasing the option to shares that are expected to increase in price, then turning them over as soon as the expiry period ends.
Binary options are quite different. Instead of purchasing a stake in the company, you are essentially betting on the worth of that stake in the company. Since you do not own a share of the company, you cannot profit off of its gains and do not receive dividends. Instead you predict whether the company’s stock price will rise or fall to a certain point and bet accordingly. The advantages in doing this are the fact that you have the ability to bet on the stocks of a company or other asset that is out of your price range if you wanted to purchase shares.

For example, shares in Apple are currently quite expensive relative to other stock prices and, as such you may not be able to afford the amount you would prefer to purchase. Instead, by trading Apple binary options you do not have to pay the stock price, simply the cost of the option.

Level of Risk

Although there is risk anytime you are investing, many investors consider binary options to be a higher risk style of investment compared to traditional stocks and stock options. With a stock, if the price after purchase begins to fall, you can hold on to the stock for as long as necessary, in the hope that it will eventually begin to rise again, enough for you to recoup your initial investment, or a large percentage of it. With a stock option, you can choose not to purchase the shares if the price drops and simply forfeit money invested in the option.

Alternatively, binary options have a fixed time to expiry and there are typically only two outcomes: in the money or out of the money. Essentially, what this means for investors is that there are fewer possible ways to earn money and more potential for loss. The benefit, however is that the potential returns are much higher.

Technique Used in Trading

Often unrealized by investors are the similarities in technique used in investing in stocks, stock options and binary options. If you currently are actively purchasing stocks, then you most likely have a good grasp of the market and how to make wise investments. These skills are necessary for trading binary options and will make the learning process go infinitely faster. By understanding how to read financial statements and charts, you will easily translate this into signals that help you determine when the best time is to buy binary options.

Available Assets

Another similarity between traditional stocks and binary options is the different types of assets that are available to trade. Stocks and stock options can be purchased for a single company, commodity, index or in foreign exchange. This holds true for binary options as well only, as stated previously, you are not holding a share of any of these assets, simply a bet against it.
By first becoming familiar with the stock market and how to trade stocks, you will feel more comfortable and have a head start when it comes to trading binary options. Consider the similarities and differences and determine if trading binary options is something that would be attractive to you.

Binary Stock Trading vs Traditional Stock Trading

The most basic type of stock trade is where you simply buy and sell stock in a company. Buying stock in a company is essentially a bet that the company is going to do well, and that you’ll later be able to sell the stock at a higher price than you purchased it for, resulting in profit. While it’s possible to short sell stocks, the process is highly convoluted and somewhat risky. This is how most people profit in a bearish stock market, by ‘short selling stocks’.

Binary stock trading allows you to bet on whether the price of a particular stock will rise or fall without actually purchasing the stock itself. You can bet the price will go up, and use a ‘call option’ or you can bet the price will go down and place a ‘put option’.

With binary stock trading, the magnitude of price movement is not a factor in the amount of payout received on the trade. With binary trading you either win or lose the trade. It does not matter how big of a win you have, your payout is the same as if you squeaked in a 1 pip win. With traditional stocks the magnitude of movement greatly affects how much money you earn or lose with the trade.

Traditional Stock Options vs Binary Options

Traditional stock options give you the right to buy or sell a specified amount of stock at any price and time before the option expires (which we call a “call” or “put,” rather than a buy or sell). With stock options you don’t actually own a piece of the company—a stock option is just a temporary contract, and there is always another trader at the opposite end of your stock option trade. Someone will win and someone will lose. These trades typically appeal to people with less capital; they offer a higher leverage than traditional stock trading as well.

Binary options for stocks are contracts, like traditional stock options. They have expiration times, just like traditional stock options. You also have the option to call or put, which means you can profit in a rising or falling market. When you take out a binary stock option, however, what you’re doing is betting that the stock will or won’t reach a certain price within the expiration period. If you win the bet, you win the amount of money you invested in it. If you lose the bet, you lose your investment.

So you can look at a binary option as a specific type of stock option. Except instead of making a buy or sell decision during the expiration period, you make your decision when you call or put, and then you wait to see what happens (or get out if you think that is best).

With binary options you may be able to enter the market with less capital, as you can with standard stock options, and you may profit in a bullish or bearish market. Trading binary options does include large risks and spreads, however, so you’ll need to account for that when you figure out your bankroll and how you’re going to manage your money. And as with any other type of stock trading, you will need to approach binary options with some kind of solid method in place which has proven results in order to become profitable over the long term.

Are binary options right for you? That depends on you—different personalities and budgets may be better suited to binary options trading, standard stock options, or traditional stock trading.

Using Binary Options to Trade Stocks

In trading, it’s often best to stick with what you’re familiar with and good at. Positive habits tend to build positive results in all facets of life, and it really isn’t any different when it comes to trading. Therefore, I tend to stick with currency pairs, namely major currencies (like EUR/USD, GBP/JPY), because I’m familiar with the way in which they move. I also stick with the same timeframe, as well, over 99% of the time (five-minute chart).

But every now and then, I do mix it up somewhat. About once every couple months I might trade one-minute options, perhaps longer timeframe options (rarely and haven’t for a long time), or a different asset altogether. In this case, I decided to venture over to trading a particular stock – Apple Inc. (AAPL) – given the time I had available to trade was a bit later in the day. It could spice up my routine and my blog at the same time from the usual rigmarole of currency trading.

Stocks have a different sort of price action from currencies. Currencies can definitely be a lot more volatile. There are usually multiple ebbs and flows in the direction and strength of a trend or price movement during the day. It’s natural, as currencies basically reflect the economic health or conditions of a particular country or jurisdiction. Forex is a 24/5 market, so news announcements are released during trading hours, and spikes in volatility can be expected around these times.

Stock prices, on the other hand, reflect the health of a given company and news releases (e.g., acquisitions, earnings reports) tend to be posted either before or after market hours. Stocks are only traded during a select fraction of the day (usually for around seven hours depending on what market it is), five days a week, unless a national holiday shuts down the markets for a day. So the price action tends to be a lot smoother. It’s really up to each individual to determine what kind of trading preferences he or she has. Some prefer forex, because you can trade at any time during the day, or they enjoy the more active movement. And some prefer equities/stocks because it simply fits who they are as a trader in whatever way(s).

So I’d like to share my AAPL trades for Friday. I also have a previous post on AAPL trades that can be found here.

The U.S. markets (based in New York) officially open at 9:30AM. I didn’t begin trading the markets until close to 10AM. Price was working around the daily pivot level at the market open, but I probably would have avoided any trades around here – namely, put options at the pivot. The thing about trading stocks is that the price action isn’t continuous. There are five trading breaks during the week – between each weekday and the weekend – so in the beginning of equities trading I usually like the market to break in whatever direction it happens to feel inclined to go. In this case it wanted to move into an uptrend and broke the pivot leading into the morning.

My first trade occurred at the resistance 1 level of 100.977. There was some congestion/indecision in the middle of the pivot-resistance 1 channel, nearly touched 100.977 on the 10:15 candle, and rejected it on the 10:20. All this led me to believe that the likelihood of at least a temporary reversal (or having it hold under the level for under ten minutes) was reasonably strong.

Consequently, I took a put option on the 10:25 candle upon the touch of 100.977. All I needed was a hold under resistance 1 by the end of the following candle to get started on the right foot. The 10:25 candle did settle under, and was up by 0.15 by one point. But the closing candle did not ultimately respect resistance 1 and I lost this trade by about 0.13.

Price stalled in the middle of the resistance 1-resistance 2 channel and fell back down to 100.977. I did not receive a perfect rejection of resistance 1 here. The 10:50 candle fell about 0.10 below the level and closed slightly beneath it, as well. The 10:55 showed that some buying orders were indeed occurring on some level at resistance 1, which gave me a clue that a call option down around resistance 1 could be a good area. Like yesterday’s post, and for those of you who use pivot points as a support and resistance tool, trades don’t necessarily have to be taken at these levels themselves. Sometimes the evidence suggests that that may not be the best route to take.

In this case, since price formed a line of support just under resistance 1, I in turn used the bottom of the 10:50 candle/open of the 10:55 as support instead. When price touched here on the 11:00 candle, I entered a call option. Despite going out of favor in the early goings, I eventually won this trade by about 0.25.

After this, price continued climbing. Nothing materialized at the daily high (thus far) in the middle of the resistance 1/resistance 2 channel, and began targeting resistance 2 (101.373).

This trade turned out similar to the previous one. While congestion was shown around this level, it didn’t show a precise rejection of the level. Instead the line of resistance occurred 0.01-0.02 above it, as shown by the close of the 11:30/open of the 11:35 candle. And this, of course, is fine by me. It still shows that the general area is targeted as a potential reversal/congestion point. And it also allows for a slightly better entry than just resistance 2 itself given we’re doing a put option here.

When price came back up to 101.390 on the 11:40 candle, I entered a put option, expecting the general resistance 2 area to hold. The closing candle was the very next one, and I did receive enough of a bounce to win this trade by just a few cents. The real bounce came on the candle thereafter. But in binary options, you simply need to be on the right side of the fence at a given time, so small winners count just the same as large ones.

That was it for the week, a 2/3 ITM day, and 8/11 ITM (72.7%) for the week overall.

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