Understanding Options Basics. Real  Trading Scenarios

After reading the first three articles I have written about money making strategies in binary options trading, you should have a fairly solid idea what options are, how you can make profits trading binaries, and a solid understanding of the trade lingo, as can be seen in the binary options reports glossary .

Still, in order for all the dots to connect you actually have to see an options trade being done, and then taking a risk and invest on an underlying asset.

So lets go through a trading scenario. The easiest way to make a fast buck is to do it with a fund that tracks a major index. In this scenario, lets use the SPDR Dow Jones Industrial Average. (NYSE: DIA). The Dow has had a solid upward uptrend for the past two years, but I believe it has a lot more potential.

So in this scenario, we will be buying a call option contract with a strike price of $180 (the fund trades at a 100th of the index) and expire on May 5, 2012. This means that if you are doing research and checking out posts by seasoned day traders, they would call it a May $180 call option on the Dow SPDR.

Though prices fluctuate every hour and every day, similar to stock options, the option to buy shares of the Dow fund by May with a $180 strike price was trading for about $3.49 when I wrote this article.

Now, a few things can happen.

The upward trend (or trajectory) my continue and the contract will expire in the money. If  that happens, the option to buy the fund at $180 will be valued at a much higher rate (or higher percentage) than the fund itself.

As the timeline progresses closer and closer to the contract expiration date, the higher the stock rises, the higher the value of the option or the underlying asset.

If this happens, you can sell the option and make some easy money, just like youd sell a stock.

Alternatively, the opposite can happen and the Dow can take a dip. The same is true in this scenario only in the opposite direction. The sharper the Dow takes a dip and the closer it gets to the expiration date, your stock option will be devalued in a relative fashion.

In this scenario you can either sell for a loss or wait for the stock to rise again. This can be averted if you use a protective put .

This is really a situation where you need to act swiftly and make bold decisions. Click here to see my previous articles on trading psychology, emotional trading, and in general to see if trading binary options online is right for you. Because if you fail to act, meaning to either sell the contract or exercise your right to buy or sell – by the expiration date, you lose your initial investment. If you are just starting out, you should expect to lose money, its a price you pay to earn a good education.

In a nutshell, binary options allow you to invest in an underlying security (asset); C ommodities,   stocks,  indexes and  ETFs – with lower costs up front and higher returns on your investment. In binary options, as in all cases the higher the risk the more gains that you stand to make.

Quick recap on to binary options basics, you make a profit whether the stock is going up (calls) or down (puts).

This is why, investing in options can be so much more lucrative than trading stocks.

As you gain more experience, you can deliver better results and higher  profits.

Now I recommend you make an informed comparison and look for the best or exclusive deals. Binary Options Reports has featured reviews on the best binary options brokers you can find. Simply click here  and check out any of the recommended brokers.

Dont forget that if you are just getting started or would like to keep your other job and do some day trading on weekends and nights. This can be a  quick and easy way to establish a  new or secondary stream of income. Learning how to make a bet on future market movements by using the right financial instruments and making successful long term and short term trades are a great way to start trading exotic options (also referred to as digital options). Recommend you take a look at todays weekly summary as presented by the CBOE.

If you fee confident and want to start trading binary options now click here .

****CBOE Daily Market Summary for Wednesday, April 25, 2012***

Ratios

Total Put/Call Ratio 0.75

Index Put/Call Ratio 1.34

Equity Put/Call Ratio 0.48

CBOE Volatility Index (VIX) Put/Call Ratio 0.76

BXM CBOE S&P 500 BuyWrite Index