Binary Options Put Option

United_states_currency_greenbackUnlike traditional stock market trading models, in binary options trading, the trader is required to forecast whether the value of the asset they are investing in will have risen or fallen by a predetermined expiry time. One of the binary options trading alternatives available to traders is the Put option, which is essentially a prediction that the price of an asset will have fallen by the specified expiry time. This type of trade is the opposite of a Call option, which is a prediction that the asset price will increase on expiry of the options contract.

By keeping their finger on the pulse of the market, staying up to date with current financial information and understanding past value trends, traders can develop the skills necessary to predict the direction an asset price is likely to move. Once these skills are established, a trader can then execute a Put option whenever they anticipate a decline in an asset price.

Definition of the Put Option

A Put option is the polar opposite of a Call option. What the Put means is that there is a type of ‘safety net’ which allows the binary option contract holder to sell a certain number of units of the asset at a predetermined price (referred to as the ‘strike price’) by a particular expiration date. A typical Put option has the following characteristics:

  • The option must have an expiry date.
  • The Put option always has a strike price.
  • Every Put option must have an actual underlying asset, which could be a currency, index, stock or commodity.

The Put option got its name from the fact that this type of binary option relates to the option holder’s right of ‘putting’ or selling the particular asset to someone else at a price that has already been determined. The trader benefits from this in case the price of the asset decreases by the expiry of the contract.

Example of Trading a Put Option

To determine whether it is the appropriate time to buy a Put option, a trader must be able to monitor investment news from various sources as they execute trades. For example a binary option trader may be monitoring financial news and stock market information and notice that a technology stock (such as Samsung) tends to decline each time a competing company (Such as Apple) releases a new product. When such a trend is spotted, it gives an insight into the likely future behavior of Samsung stock whenever a competitor has a new service or product. In this case, the competing product or service acts as a trading signal for Samsung stock.

Final Word

Understanding how a Put option works is an essential part of successful trading, because it is one of the two trading positions that can be taken in this type of trading. By constantly monitoring happenings in the market, binary options traders can quickly identify when buying a Put option is the best strategy for their trades.

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