Investment experts concur that portfolio diversification is financially beneficial. The options market covers a wide array of trading formats that are used by millions of investors seeking to diversify. A large number of the accessible options are referred to as “exotic”. These include binary options, quantity-adjusting options and Bermuda options, among others.
Binary Trading
Investors consider the options market to be simple, cost-efficient and quick. With a few clicks on an online trading platform, the world of market investing is up and running. Take a look at the trends; choose your asset; choose your timeframe be it minutes or hours; find your strike price; choose your investment amount; and place your put if the trend is downward, or your call if the trend is up.
The payout on each binary options trade is clearly defined. If you have placed a call on Asset A, and at the expiry time Asset A is above the strike price, then you will receive the specific payout agreed upon. The amount of the increase over the strike price is irrelevant. By contrast, in traditional options, the payout figure is determined by the amount of that increase.
What happens if you have placed a put on Asset A, and at the moment of expiration the price shows a rise over and above the strike price? You gain nothing and lose the investment that you have placed on the trade. It is specifically this scenario that has led successful traders to recommend that, at least in the initial stages of your trading experience, you invest only the minimum premium on each transaction.
A binary options trade can more easily be viewed through the following example. You have studied the grain market and determine that the invasion of Crimea by Russia is causing a current price rise in the commodity of corn. You project that the rise will continue for at least an hour and feel comfortable with a 30-minute open-to-close timeframe. The strike price is set at $4.90 per bushel. You open a binary call option with a premium of $7. The payout is set at $10. Exactly 30-minutes later, the price of corn is $4.91 per bushel. You receive the $10 payout. Had the price of corn not increased, you would receive nothing.
Binary options are also referred to as digital options. The all or nothing nature of binary options, and the upward or downward movement in price, both independently create the dual aspect that has resulted in the name “binary”. Binary options are by far the most-traded market of the exotic options.
Quantity-Adjusting Options
The subjects of quantity-adjusting options, commonly referred to as quanto options, are international assets. Investors who want to delve into foreign markets, are often wary of the volatility in currency exchange rates. Quanto options address that concern by specifying the rate of exchange to be applied to the transaction. The payout will be tendered in the currency of the investor, at the exchange rate stated in the options trade agreement.
Let’s look at a trade involving a rising stock in the U.K. AVIVA PLC ORD 25P (AV) has currently captured the Number 1 spot in the rate of rise for entities on the London Stock Exchange. This stock is clearly trending upward, and priced on 06/03/2014 at £504 per share on a volume of 24,240,426. However, an investor in Australia is worried about the constant movement in the currency exchange rate of the GBP/AUD, which on 06/03/2014 is 1.84186. That investor is willing to pay a greater premium for the Aviva trade in consideration for fixing the exchange rate at its 06 March 2014 level. With the increased security in avoiding the volatility of the currency market, the investor can confidently open a quanto options call transaction. If the present upward trend continues to the expiry time of the trade, then the payout will be received by the investor in Australian Dollars at the agreed-upon GBP/AUD exchange rate.
Quantity-adjusting options open foreign markets and close the uncertainty surrounding currency exchange rates for global investors.
Bermuda Options
Most European and American facets of life differ significantly. By the same token, European and American options contain contrasting elements. American options provide for the possibility of closing the trade at any moment between the time of the opening of the transaction, and its expiry. European options do not offer that feature, as they allow for a close only at the time of the agreed-upon expiration of the trade. The added flexibility of American options carries with it a higher cost.
Bermuda options utilize features from both formats. Not only can the investor close at the time of the transaction expiration, but also at various other times during the period between the placement of the option and the expiry. The specific times allowed for closing are established prior to the opening of the trade. Bermuda options are less costly than their American counterparts, and less rigid than European options.
The purpose of exotic options is centered upon the facilitation of trading when specific circumstances are present. Difficulties, such as exchange rate volatility in foreign asset acquisition, are often encountered in the traditional options market. These moguls can be diminished through specially-formatted exotic options. For those seeking a uniform, simple and transparent payout, binary options fit the bill. For foreign investors seeking to minimize the effect of movement in rates of currency exchange, quantity-adjusting options fix the exchange rate. Investors seeking greater flexibility in trade closings than that afforded by European options, and lower premium costs than American options require, turn to Bermuda options.
The focus of the online options market is the comfort and success of traders. This focus has given rise to various specialty options, such as binary trading. Experienced traders utilize the full range of options to maximize their profit potential.
Author Bio
Orit Nathan Mahalal is Banc De Binary’s Head of Content, an accomplished writer and social media expert. At Banc De Binary, Orit heads a team of copywriters who, under her direction, create content for all aspects of the business, internal and external. Orit’s key role is to ensure that only top quality, superior copy enters the channels and that Banc De Binary stays at the forefront of the binary options industry.
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