It has never been a hidden fact that binary option trading currencies in the forex market can make you earn great profits. Binary Option Trading currencies in the forex market with the help of some good knowledge and some binary option trading tools can help you make your fortunes. But then one thing to be taken care of is that a binary option trader needs to have correct and optimum information about the forex market different tools and the options available for binary option trading. This is because just having an idea about the direction of the movement is not enough it is also necessary to know how much it would move.

For example if you are binary option trading the currency pair of USD/EUR and if you are of the opinion that the decision is correct then you would surely go with the “buy” order and this is because you are expecting that the price of Dollar as compared to Euro would go up. If at all you have placed your digital option trade at 1 mini lot which is like equal to $1 fro each pip and apart from that your target for the same trade is say 30 pips then it is quite sure that you may need to have nothing less than $1000 into your binary option trading account. This is because you will be able to have some space for the draw downs. It at all by correct practice and luck if the trade is successful then there are high chances that you may earn profits of $30.

But then in this case to make this happen it is important that the price of the dollar moves 30 pips as compared to the Euro. This is said to be important because if this target is not achieved you will not be able to earn the desired profits. You might have seen most of the times whenever you predict prices in the forex market you will have to not only see to the predictions but will also have to see how far it goes. This sometimes makes it difficult for the binary option trader but then is advisable and important.

At this point of time if as a binary option trader you have say $1000 in your digital options binary option trading account then the major question that would arise here is that what is that you would require so as to place a trade that is successful and above that what will be the amount of profits which would be delivered to you by this kind of a trade. This can be better known by an example. Let us take for instance that the price of USD/EUR is 1.94874 and as per your predictions with respect to the market conditions you think that dollar would go up as compared to Euro.

You may go with this but then in case if you place a “buy” option for that a specific currency then you would buy a $100 call option for the USD /EUR pair with an expiration of 1 hour. If at all you are right at your decision and the price of the option goes up though just 0.001 pip above the price that the call option has been purchased and it is stable there then you will be entitled to get 75% of returns on your investment of $100.

Binary Options are an investment tool, which allows you to get a high return on investment in a short time period.
For example, If you would invest a $100.00 by creating a ‘Call’ option (that means you estimate the stock price will go up by expiration time). At the time of expiration it turns out the stock went up by 0.00001%, that means it now worth’s 100.00001$. In a regular European option all you would get for you time risk and money is less then one cent! By investing in binary options you’ll get 60%-70% as long as it expires ‘In The Money’, no matter how much it went up! (or down, if it’s a ‘Put’ option)
Binary options are less risky than Forex trading
In addition to the high return mentioned above another advantage is that though you get a high return on your money there is not leverage and no need to deal with ‘stop loss’ conditions and other tolls to hedge your money since there’s no way for you to lose more than what you invested in the first place. In fact, Some of the options in Binary Option gives you back up to %15 of the amount even if the options is ‘out of the money’ at the time of expiration (Nadaq options only)

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Futures and options are basically derivatives traded in exchanges. Derivatives by definition are those financial products whose values depend on the value of some underlying assets. For example an option on wheat will depend on the actual price of wheat in the market. A future on the US dollar will require a margin that depends on the current exchange rate of the Indian Rupee to the US Dollar. The share option & future also depends on the actual price of the share in the market.

Why derivatives?

Derivatives are contracts that were conceived basically to over come future problems. They were traditionally used to hedge (protect) the capital invested and /or the profit expected. The origin of derivatives can be traced back to the forward agreements between traders and farmers for agricultural commodities. The agreements between them basically fixed the price of the commodity say cotton (India [ Images ] had a robust cotton forwards market prior to Independence) irrespective of the volume grown. The advantage to the farmer was that the price for his produce was known in advance and he gets an advance payment too to support his sowing and crop growing. For the trader the advantage is that the price is fixed and he gets a steady supply of the crop. Derivatives thus prove to be beneficial for the farmer and the trader.

Derivatives today

The derivatives markets today are dominated by the forwards market for foreign exchange deals between companies and their bankers and by the futures & options market for the share market and the commodity market.

The volume of trade in India in the derivatives market for stocks is very high, in the range of Rs 68,000 crores (Rs 680 billion) every day. Compare this with only about Rs18,000 crores (Rs 180 billion) in the actual cash segment (where shares are bought and sold) of the stock market.

The volumes do not justify any hedging being done by actual share holders. The market is being dominated by speculators who look at daily positions trading. Thus the purpose for which derivatives were created is not being made use of in the market traded derivatives.

Are derivatives investments?

No, they are not. Futures are contracts to buy or sell an underlying (share or commodity), which expire at a particular time. Options do not obligate the buyer of the option to fullfil the contract, if it is unfavourable for him/her. Options require a premium to be paid for entering into the contract. Futures only require a margin to be maintained. After the expiry of the time, they have no value.

Since the value of the contract expires automatically, derivatives are not assets. Hence they are not investments too.

Leverage in derivatives

Derivatives have very high leverage. Leverage similar to the normal lever used in everyday life, where in a small applied force is multiplied many times. Examples being the car screw jack, and scissors. Financial leverage is used to make a small amount of money work the equivalent of a large amount of money.

This is made possible using derivatives. The price or margin required to enter into a contract is low. But the contract value itself is large. Even a small profit margin in the contract, will give big returns to the person who entered into the contract. For example an option contract on L&T for 200 shares at Rs1560 costs Rs124 only. That means with only Rs 124 in ones pocket a trader can deal with money worth Rs 1560 x 200 = Rs 3,12,000/-. For a Rs 2 margin per share (if it materializes), the trader will make (Rs 400 – Rs 124) Rs 276 as profit – this amount to 220 per cent profits.

Downside of leverage

However the down side for the leverage is that it can also act against the trader. In case of a even smaller loss of say Rs1 per share, the loss for the trader is (Rs 200 + Rs 124) Rs 324/-. Much larger than the money that he/she brought to the table.

Unlike direct investment in shares, in the futures and options business the losses and gains are for real and have to be borne by the trader. Also in India the maximum time for the contract to expire itself is only 3 months. This time is not enough for any serious hedging and is suitable only for speculation. The problem here for the trader is that one cannot sustain a series of losses, whereas the large financial institutions that are creating the derivatives can.

Conclusion

Futures and options are not investment tools. They are part of the broader tools called derivatives used for hedging of assets and to protect profits. In India, futures and options are predominantly used by speculators. The good and bad side of derivatives is that they are highly leveraged. But the risk is higher for the trader as he/she does not have deep pockets to sustain a series of losses.