Binary Options for Protected Investments
One of the main concerns for individual investors is the safety of their money, and this often influences where they choose to invest. While treasury bonds and bank deposits guarantee a high level of capital security, stocks and funds carry the risk of loss, which can have a significant adverse effect on invested capital.
Derivative products such as options and futures carry a much higher level of risk because you can lose more than you originally invested.
Many investment fund companies capitalize on the concept of "capital protection," and some of them issue their own capital guarantee funds and core protected assets (PPNs). These products provide ample return potential while guaranteeing the safety of the amount invested. It's interesting to note that individual investors can combine binary options with bonds to create similar capital - (CPI) protected investment products, on their own.There will be no fund management costs, and you can decide how to configure it yourself.
This article is intended to give the reader a basic introduction to the options.
A Brief Introduction to Binary Options
Binary options are popular trading tools with a unique "All or Nothing" payout structure. New York Stock Exchange introduced its own version of binary options under the name Binary Return Derivatives (also called Byrds), the popularity of binary options, as expected, received an additional boost.
Based on this, the profit from a binary option will be the final estimated price when the underlying targets are set above or below the price at the time of the option contract. Suppose you buy a binary option with an exercise price of $ 50 of the underlying stock, paying a premium option of $ 33. If the underlying price rises above $ 50 at the time of expiration, the buyer will receive $100 as an ALL binary option payout. If it ends at or below $ 50, the buyer receives no gain ("NOTHING").
In the first case, the buyer's binary option net profit is $100 (payout) - $ 33 (premium paid) = $ 67. In the latter case, he suffers a loss of $ 33 because his binary contract expires without result and he receives nothing.
Let's look at how to create a protected investment with binary options. Suppose Mike has $ 2000 and he wants to invest them to get higher returns, but he also wants to have some protection for his investment.
U.S. Treasury bonds provide a guaranteed return with no risk.
Suppose one year of Treasury bonds offers 6% of profit.
The age on the bonds is calculated using the following formula:
Maturity = Amount Main * (1 + rate%) time,
where the rate is in percent, and the time in years.
By investing $2000 for a year, Mike will get:
Maturity Amount = $ 2000 * (1 + 6%) ^ 1 = 2000 * (1 + 0.06) = $ 2120.
For Mike, to keep his capital at $ 2000, the above formula could be reverse engineering. He essentially has to answer this question - How much should I invest today to get $ 2000 as a repayment amount after one year?
In this case, repayment amount = $ 2000, rate = 6%, Time = one year, and we must find the capital amount.
Let's regroup the formula: Capital amount = Repayment amount / (1 +% rate) Time.
Capital sum = 2000 / (1 + 6%) ^ 1 = $ 1,886.8.
Investing $ 1,886.8 in the above bond will secure Mike's capital, as he will receive $ 2000 at the end of the term.
The remaining amount ($ 2000 - $ 1,886.8) = $ 113.2 can be used to buy binary options that offer high return potential. Suppose Mike believes that the stock ABC Inc. are currently trading at $30 and have the potential to reach $ 55 within one year. A binary option is available on these shares with a term of one year to expiration and the price at $50 of the option is available at $37. He can purchase three such binary options for an amount of $ 111, which fits within the amount of money available ($ 113.2).
If Mike's assumption comes true and the ABC stock reaches $ 55 (or even higher), each of his binary options will yield a $100 gain of (300 $ for three binary options). His total return from bonds and binary options comes to ($ 2000 + $ 300) = $ 2,300. From his total invested amount of $ 2000, his net return percentage comes to ($ 2300 - $ 2000) / $ 2000 * 100% = 15%. In this case, his capital remains preserved and he also receives additional income.
Assuming Mike is wrong and ABC stock fails to cross a strike of $ 50, he loses his option premium of $ 111. In this case, he loses, but his equity remains protected.
In both cases, the capital remains intact. Potentially possible profits come from binary options that may or may not result in high returns.
Options and disadvantages
While such ready-made investment products can be as well marketplace home sale funds, they can have a high cost and may not fit into your personal choice of investment horizon or underlying assets. Creating such protected investment products allows people to have the flexibility, in choosing an underlying security, investment horizon, or bonds.
If you have a bearish view of security, you can purchase PUT binary options that produce positive results when the underlying price declines. Other options may include capital protection level limits from 100% to a lower value - say, 90%, 80% or 50%. This would provide more residual money to buy binary options, resulting in a higher return potential. However, since this comes at the expense of lower capital protection, you should adjust the combination to suit your own risk appetite.
To summarize the above, it is very prudent to allocate the residual amount of money through multiple binary options to various unrelated trades. This increases the downside potential in at least one (or more), binary options on different underlying assets and thus will be able to provide higher returns. Nevertheless, you should be cautious about high transaction costs, which can wipe out profits.
Options are traded in batches, and you can't always get the exact number of options needed to settle. Inexperienced investors also get into situations where they buy very risky options at a high price, which often result in losses. Although capital appears to be protected, the opportunity cost of capital results in a loss. Hidden inflation combined with opportunity cost reduces the real value of capital over the investment horizon.
Options are often perceived as high-risk instruments, but using them effectively, with careful study and the right combinations, can yield excellent profits. Protected capital investments using binary options can easily be created on their own. They offer a balanced and effective alternative to risky trading with stocks and funds, and investing in the latter often results in capital losses.