If you are a newcomer to online binary options trading, the two most common words that you are likely to encounter in the industry are put options and call options. By far, these are the top binary options trading words and they are related to the price movement of assets.
In basic terms, a put option predicts that the price of a chosen asset will decline, while a call options predicts that the underlying asset’s price is going to rise.
A trader can only make a profit if their prediction of put or call for their chosen asset is neither below or above the strike price when the expiry date and time elapses.
Market conditions play a primary role when deciding whether to execute a call or put option. Should the market be bullish, traders tend to assume that the asset’s value is going to rise, whereas if the market is bearish, traders prefer to sell their assets.
As it is possible to make a profit with either a call or a put option, it is easy to see why binary options trading is so popular with investors.
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The Basics of Call and Put Options
A trader places a put option trade if they believe confidently that their chosen asset’s value will end up lower than its striking price when the trading period expires. The value of their chosen commodity must be lower than its starting point in order for the prediction to prove correct and for the investor to make a profit on that trade. Should the commodity’s value be higher than the put option, the trader will make no profit.
A trader will place a call option trade when they think that their chosen asset’s value will end at a higher price than that it began with once the trading period comes to an end. Should their chosen commodity end at a price that is higher than the striking price when the expiry time arrives, the trader will make a profit. In short, this is the opposite of placing a put option trade.
How to Place a Call or Put Option
Using appropriate technical analysis skills is very important when determining where to place a binary options trade. It is almost impossible to become successful in the industry without learning at least a little about statistical analysis as it is key to making an informed prediction about trading entry points as well as the performance of prices over time. If an investor observes that there are strong price trends in either direction, it is fairly simple to place an appropriate trade, however if there is not a strong trend to either direction in prices, a trader must place a trade by observing historical price movements.
Expiry times are also an important factor in the placement of a binary options trade. Using recent price performance information is important when making a trade that has a short expiry time, while the underlying asset’s performance is important if making a trade with a longer expiry time. Proper statistical analysis can revel the low and high prices of a chosen asset over a specific time period, and although the asset may sometimes go below or above these lows and highs, it will usually stay within those boundaries.
Skilled traders usually assume that if the price of an asset moves near to a statistical boundary, a trend reversal will usually take place in the short term. Around this point is one of the best times to place call or put options. Although it can be hard to predict an asset’s price break out of its boundaries, it is possible to make a profitable trade by doing this.
It is very important for novice traders to realise that they should never execute a call or put option based only on guesswork. Instead, the potential investor must asset the behaviour of the market and its current trends, observe the latest price movements and perform appropriate technical analysis before they decide whether to execute a call or a put option trade.
There are many binary options tools available online which can be used by investors to study the price performance of all commodities and so inform their trading choices.
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- The relationship between put and call option prices. Stoll, H. R. (1969). The Journal of Finance, 24(5), 801-824
- The value of an option to exchange one asset for another. Margrabe, W., 1978. The journal of finance, 33(1), pp.177-186