Are binary options for a risk or not?

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Are binary options for a risk or not? Much of the focus here is on discussing the most basic option concepts and building from there

The other main goal is to guide your understanding of how options work. Such knowledge allows you to use options effectively.

It’s easy for someone considering themselves to be an options educator to tell people that they should buy call options when they expect an underlying stock price to rise and buy puts when a decline is expected. However, this would be a huge disservice to those readers. There is much more to using options than guessing whether stocks will move higher or lower. By the way: profiting from these guesses is much more difficult than it seems.

Options were invented as risk reduction tools. To be more specific, they were created to shift risk from those who want to avoid too much risk to those who are willing (for a fee) to accept it. If this sounds as though options can be used as insurance policies, it is because they can. Most newcomers to the world of options never get introduced to that concept of risk reduction and therefore end up using options as a gambler would. We encourage you to use options as someone who wants less risk when investing in the stock market.

The final decision on how to use the options is up to you. Our job is to make sure readers understand the difference between speculating and hedging, so they can make smart decisions. Therefore, most of the articles refer to ways to generate profit with less risk (i.e. with less money at stake).

If you prefer to speculate, then consider learning how binary options work. You may want to make sure you are very familiar with binary options and their risks before investing. There are also many brokers who will allow you to trade binary options. Before deciding which platform to trade on, it would be best to take a look at the difference between brokers:

Risk prevention vs speculation

When you buy homeowners insurance, you are betting with the insurance company. For a fee, also known as a premium, the insurance company guarantees to provide money to replace your home in the event of its destruction. You don’t expect to win the bet. In fact, you hope that the insurance policy will expire unused. However, buy insurance when you can’t afford to replace your home if the unexpected happens. So you buy peace of mind insurance that it offers.

A risk averse shareholder can do the same. By paying a premium to purchase a put option, the shareholder is guaranteed (for the life of the option) that the stock’s value cannot fall below a certain price level (the strike price of the ‘option). As is often the case with home insurance, time passes, the insurance policy lapses or the put option expires and the cost of home insurance is lost. The question for most people is whether that cost was worth the peace of mind it offers. The answer is almost always “yes” when dealing with a house.

The point of this discussion is to make sure you are aware of this.

  • Put buyers tend to come in two varieties. Conservative investors who own stocks and aggressive traders who are willing to bet that the stock price will go down.
  • Put sellers almost always speculate (this is not the time to talk about exceptions) by betting that the stock’s price will not fall, or at least that it will not fall enough to result in a monetary loss.

Covered calls

To reduce risk when investing, there are several options strategies that should suit your needs, including writing covered calls and selling bare cash backed puts. We must remember that buying puts as insurance when you own stocks is not a good choice. It is a popular choice because investors don’t make an effort to understand options as they should before making their first options trades.

If you prefer to speculate, we encourage you to recognize the associated risk. The main point is that you should avoid taking unlimited risk when it is so easy to limit risk with every trade.