by Charles Githongo
This is a very crucial question, “How does one make money by stocks?” Trade binary options have become increasingly popular over the past years. However, since not a lot of people know the optimum earning potential of binary option trading, only a few individuals dare to get involved into this kind of business.
If you want to make money with this online trading program, there are two options available for you.
Sell Share of Stocks
You can do this when there is an appreciation of value with the stocks that you own. Simply put, this is when people wish to purchase your share of stock at a higher price than you originally purchased it for. This usually happens when stock buyers decide that the company issuing your stock started to show improved earning potential.
If you hold on to your stock with increased market value, this is referred to as unrealized gains. You will only be able to lock the gains and make money by stocks once you sell them. Market price is ever changing and constantly fluctuating. As such, you won’t be able to determine how much money you are going to get until you decide to sell your share.
Dividends from Stocks
The other way to earn money in trading binary options is when dividends are given by the issuing company. Dividends are payouts given by a company to its respective shareholders, the amount reflecting to its earnings. The payout is usually done quarterly. Stockholders receive steady streams of return with dividends, regardless of the performance of the stock price in the market. Generally, stable and older companies are the ones that usually pay dividends. The newer ones, however, do not.
Though this option to make money by trading stock options is the better choice compared to selling your shares, there is still a downside that comes along with it. The disadvantage is that there is no guarantee with dividends. A company can choose to stop paying you at any given time, which poses a huge risk on your part.
Experts strongly advise that the best way to make money by stock options is to continuously reinvest your dividends. Though somewhat risky, this is still more advantageous contrary to spending them immediately upon receipt. Binary option brokers would advise you to sign up and avail with DRIP, or Dividend Reinvestment Plan. DRIP enables you to automatically reinvest your dividends into stocks.
Make Money by Stocks – The Importance of Price
There are numerous strategies that can be applied with binary options trading, ranging from high risk to traditional. As an investor, you don’t only need to learn the terminologies involved, but most importantly, also develop a thorough and broad knowledge of different risks associated with it. It is also very crucial that you study and understand the different factors that affect the price of options. This is the best way to increase your chances o success and make money by binary options.
Directional Binary Options Trading
In most cases, the first time stock traders utilize binary options is when they want purchase a directional trading put or call. This is usually practiced by traders who are confident with the steady increase of stock price. To take advantage of the current uphill climb of stocks, they usually make a position for open option. When this happens, it is not unusual for traders to invest in options instead of the stock primarily due to the minimum risks involved, better reward potential and lower required capital.
If you have a positive outlook, also referred to as “bullish”, a certain call option purchase opens a prospect to share in a stock’s potential boost without having to risk a percentage of its current market value. However, foresee a market price decline, also referred to as “bearish”, a put purchase gives you the benefit of a stock price fall without having to worry about a big margin requirement to short stock.
Pricing Complexities of Binary Options Trading
Due to certain factors that affect the price of binary options, traders need to practice the art of strategic thinking as this will be very beneficial in this field. Price is the only major thing you have to be concerned about with regards to stocks. That’s why it is very critical for you to develop the skill of foreseeing the potential stock price movement. However, a switch between stocks and options is quite complex, despite your broad knowledge with stocks. With regards to options, there are 3 primary changing parameters that could greatly affect price – stock price, market instability and time. Any change involved among the three has the power to influence binary options trading value.
Make Money by Trading Stock Options
There are a lot of strategies you can follow with trading stock options. However, in order to be successful, each trader must develop in-depth knowledge about two important types of trading stock options – the call and the put. If you want to take advantage of it, you need to alter the way you think. Stock traders who only focus on market direction may take great value on every leverage and flexibility offered by stock options. However, what they don’t know is that, solely focusing on these factors, they could be missing on other great opportunities available with options.
Aside from the upward or downward movement of stocks, its direction also has a tendency to progress sideways. Traders may observe only a slight movement for long periods, or the opposite. Simply put, stock movements are nothing but unpredictable which could be downright stressful for most stock traders. On the other hand, option traders consider this a unique money-generating opportunity, despite the unpredictable movement and direction changes. In order make money by stocks, experienced traders make use of various strategies designed specifically for these situations. The most common strategies used are butterflies, calendar spreads, strangles and straddles.
When you talk about mathematical models and formulas, there are so many out there made to compute a stock option’s fair value. All you need to do is enter the necessary figures, like stock price, interest rate, time, future volatility and dividends. The result is the value of a particular option. Listed below are the overall effects of variables on the price of a stock option.
Underlying Price. Value of the puts and the calls are determined by the underlying price change of the stocks in a fairly basic way. When stock price soars, the calls value increases while the puts decreases. Now, when the price drops, the puts value increases while the calls decrease.
Time. The specific influence of time on options is also very easy to understand. However, it may take an amount of experience on a trader’s part before its real impact can be thoroughly understood. In every strategy chosen, it is critical to identify the future expiry of an option, the time when it is deemed worthless. As such, time will enable you to verify how lucrative your stock option will be over the long term. This is how you make money with it, knowing and understanding time’s diverse impact on positions of option and stock.
When you talk about stocks, the best ally a trader could have is time. This is because stocks purchased from valuable companies have a tendency to increase over time. However, this has quite an opposite effect on buyers of options. After a few days without prior movement or change of stock price, option value has a tendency to drop. It will continuously do so, rapidly at that, as the expiry date of the option draws near.
Volatility. Among price, time and volatility, the latter is considered as the most complex concept that beginners can comprehend with regards to optinos. The influence of volatility on the price of options may take some time to learn. Studying it, you need to start with a lesson on statistical volatility (SV) measure. SV refers to the measurement of stock price movements according to statistics. It will help you identify the stock volatility over a specific period.
However, in order to determine the exact option value using pricing models, you need to input a specific figure representing future stock volatility. To do so, you must identify what it will be during a particular option period. There is no formula for this, and the only way option traders determine this is through guessing. How do they do this? They simply work the option model pricing backwards. Along with these come other important processes you need to familiarize yourself with. That’s why, in order to increase your chances of succeeding, it is vital to be knowledgeable about volatility of stock options.
There are so many people out there who make money by stocks, and made a lucrative income out of them. Rags to riches story of people who made it though this trade, there are quite a number out there. Stock options have so much potential which only few take advantage of. Identifying the difference between stocks and options is essential, so is gaining a broad knowledge of the industry. Know that it only requires a minimal effort from you to learn the tricks and trades of how options work. You just need to understand the basics and essentials to efficiently determine the rewards and risks presented in every situation.