To begin with, it is worth understanding that there are real options, these are stock options that are traded on the derivatives market, for example, on the Moscow Exchange. There are also so-called binary options that have nothing to do with exchange trading. Accordingly, many of the fears of traders regarding the loss of money are associated with the concept of binary options, which can often be seen on the Internet. Let’s take a look at what is the difference between binary options and ordinary options, that is, stock options.
There are a number of markets on the Moscow Exchange, and the most famous of them are stock (stocks, bonds, shares), foreign exchange (conversion of different currencies) and futures (options and futures contracts).
An option is a contract for the purchase / sale of the underlying asset (the underlying asset for options are similar futures) until a certain date in the future on the terms specified in the specification of the option contract.
In fact, traders on the Moscow Exchange use these tools for various purposes:
• to insure positions – both in stocks and the portfolio as a whole, in futures;
• to make money on a non-linear market change — with the help of options, you can earn on a price not leaving the range or on a sharp impulse in any direction, as well as in many other situations;
• to make money on directional market movement – if the market is rising or falling.
There are a huge number of options for dealing with stock options, and each of them requires a different level of trader’s training. We advise beginners to first start studying stock options from the moment they buy their first share, since this tool allows you to insure, or, as stockbrokers say, “hedge” risks.
For example, if a futures on Sberbank shares (futures are the underlying assets for options) costs 14,750 rubles. When buying it, you do not know at what price you will close the deal (sell the futures). But by buying a put option (the right to sell a futures on Sberbank at 14,750 rubles for a month for 460 rubles), you insure the position in advance – if the futures price falls, you can sell it at the purchase price. But for the possession of such a right, we pay 460 rubles. And since the dynamics of the futures very often repeats the dynamics of the stock itself, it is possible to hedge both the stocks and even portfolios of securities with options.
In addition to the function of exchange insurance, options also perform another one – they allow you to earn on the movement of the asset price in a certain direction (up or down). So, if the value of the underlying asset is 14,588 rubles, you can buy a call option (opportunity to buy) at 14,500 strike for 473 rubles. For you to be able to earn, the asset must rise above 14,500 rubles by the value of the option before the expiration date. Everything by which the asset rises above 14,973 rubles will be a profit on the option. If the growth does not take place, then the maximum loss is the value of the option. Similarly, if we buy a put option for 385 rubles at a strike of 14,500, then in order to earn money, the price of the asset must decrease below the specified strike by the value of the option, that is, to 13,730 rubles. Anything the asset falls below will be a profit.
Options allow you to make money on non-linear price changes, but such option designs require more experience. Knowledgeable traders say that it is not worth allocating more than 10% of the portfolio for this kind of work. So, if the asset is worth 94,050 pp., then you can buy both a call option (for the right to buy) and a put option (for the right to sell) at 95,000 strike (the right to deal at a specified price) for a week for 990 and 1940 pp. respectively. In this case, in order to earn money, the asset must either rise above the 95000 price level by the maturity date of the options (expiration) by 2930, or fall below the specified value. Therefore, it is not so important in which direction the asset will go – it is important that the movement is powerful.
It turns out that working with stock options is very diverse and goes well with building a portfolio of securities, complementing it and helping to control risks.
Binary Options
The first trading in binary options took place in 2008 in the USA with the participation of CME and AMEX. This type of option involves receiving a strictly fixed profit if the condition (growth or decrease) above/below the specified level is met and a loss in the amount of the option value if the condition is not met before the option maturity date. “Trades” in this type of options soon began to organize various “kitchens” (companies that do not list transactions on the exchange, but make “bets” on the value with their clients). And soon the SEC began to prohibit trading in such instruments, since the transactions were not displayed anywhere, and the companies – “kitchens”, of course, did not have the necessary licenses to create such financial products. And these bans were carried out not only in the United States, but also in a number of countries, such as Canada, France and Israel.
On the one hand, the idea of binary options allows you to clearly control the possible profit and loss. On the other hand, it allows the organizers of the auction to calculate the cost of the option in such a way that it would be unprofitable to buy it in the long term due to profit limitation.
Trading binary options has nothing to do with real stock options. Not a single binary option is traded on the Moscow Exchange. Another significant difference between an option and a binary option is that when working with binary options, a trader is offered to trade only them, which entails not a risk of drawdown, but the risk of losing capital. If the condition is not met, the option is completely depreciated, and the very principle of using options to control risk and replenish the portfolio becomes violated, which is extremely unfavorable for the trader.
The difference between binary options and stock options is obvious. Options are a portfolio complementary tool that helps control risk and maximize returns. But in order to use options in this way, they must be real – stock options.