Binary options trading for dummies. Binary Options Trading Basics for Beginners

The material was kindly provided by the Options Faculty at the MasterForex Academy, and the authors presented it in an easy literary form.

So, what is an option? This is a financial instrument, but a derivative, that is, it is a thing that depends on the price of the underlying asset. The underlying asset is a commodity, currency, share, whatever.

And so, the right to sell or buy the underlying asset is an option. An option, like an underlying asset, is exercised at a time and at a price agreed upon in advance.

Let’s look at the simplest option and indicate its characteristics:

you can buy/sell it at any time

it has an expiration date

it has a strike parameter

Options are also divided by type. When building option strategies, two main tools are used: Call and Put. The Call type gives the right to buy the underlying asset, the Put type gives the right to sell.

And so, we bought a Call option on GBPUSD for $100, expiring on 04/01/2010 with a strike price of 2000. This means that we paid a $100 premium to have the right to buy the pound on 04/01/2010 at a price of 2000. That is, we are waiting for growth pound and pay for the right to buy it at the stated price (strike). What will we get? And we get the fact that on 04/01/2010 the pound will cost 2500, despite the fact that we will purchase it for 2000. We have 500 points of profit. And we paid 100 points for this opportunity. Hence the net profit is 400 points. There is a pleasant moment here that is not immediately noticeable. By purchasing a Call option, we have acquired the right to buy the underlying asset at a predetermined price, but we are not obligated to do so. Let's imagine that on 04/01/2010 the pound will cost 1500, and we will use and buy the pound, we will lose 500 points. But since we may not do this, our possible loss will be 100 points. This is their wonderful essence.

How to buy an option and how much does it cost?

Let's buy a Call option on the XDB futures at a strike of 176, when the underlying asset (futures) costs 175. For such an option we will pay a premium of $5.1. A non-obvious feature of the option is that we are not afraid of strong and uncontrollable price movements that do not coincide with our forecast, and the maximum losses are limited by the size of the premium that has already been paid for the option, no matter how many times and how deeply the price enters the negative zone.

Now compare what happens if you simply buy futures and set a stop loss; if the price touches the stop loss, the loss would be immediately recorded.

Accordingly, we purchase Put when we forecast a future downward movement of the futures.

Above we talked about buying options, but who sells them?

There are exchange-traded and over-the-counter options.

Exchange options are traded only when the exchange is open. The author of the option is a specific trader who placed an order to sell the option, and he sets the price.

Over-the-counter options are placed by a broker, who determines the price and other characteristics of the option.

Let's focus on stock options. The author of the option is a trader who decided to sell the option based on his forecasts. The sale brings immediate profit in the amount of the premium, but in case of unfavorable development, the seller faces unlimited losses. Therefore, brokers are more demanding of the deposit of the option seller, so that he can cover possible losses.

It turns out that buying is a safer method, and the premium paid to the author of the option is the price of security.

But in some cases, early sale is much more interesting. In this situation, two components are distinguished in the value: the intrinsic value is when the value of the underlying asset exceeds the strike, that is, if the futures price is currently 180 with a strike of 176, then the intrinsic value of the option is correspondingly equal to 4; Time value is made up of many factors, but in a nutshell, the more time until the option expires and the greater the volatility, the greater the chance of reaching the strike and “running” for it.

I came across an interesting article about options (http://www.comon.ru/user/E_dyatel/blog/post.aspx?index1=91788),
Clearly and interestingly written for those who want to start working with options, it will be useful, I hope there will be a continuation. Respect to the author!

Options for dummies.

“If you measure money in piles, then I have a small hole”
- the words of the option operator after the margin call.

Part 1. Why was all this written?
Let's start with the fact that I absolutely don't care about the following:

Whether you make money on the exchange or lose deposit after deposit;
Options trading on foreign exchanges;
Your experience in the Russian stock market;

What I want:

Increasing the number of active traders in the Russian options market;
Increased activity in option books;
I simply want money :) ;

In this series of articles, examples will be given, practical situations will be analyzed, and general recommendations will be given in relation to the Russian options market. All analogies and similarities with options markets in other countries are accidental; the author is not responsible for them. Actually, just like for the Russian options market :)

Part 2. Russian options market.
The Russian options market can be characterized by the following phrase:
If you are interested in options trading, then you will have to work with options on the RTS index. It’s sad, but if you compare the trading volumes of options for different instruments, it looks something like this:

There is a large bag, the size of an adult. This is the daily trading volume of options on the RTS index. And somewhere below, below the baseboard, the size of a skinny domestic cockroach, a tiny bag is the trading volume for all other options. Something like this.

Therefore, speaking about the options market, we will have to talk about options on the RTS index. Yes, this underlying asset has a lot of shortcomings, but it is liquid and this quality outweighs all other shortcomings.
I would estimate the liquidity of the options market for the RTS index something like this: you can scale your strategies without a significant loss of profitability up to a deposit level of approximately 50-80 million rubles.

An important point is that I do not consider HFT options strategies.

In this book I will not give the definition of an option; it is in a bunch of places. Let's move straight to the specifics.

Part 3. Basic concepts.

3.1. How Greeks live in the 21st century.

Greeks. This word usually goes next to the word “option”. Where did the Greeks come from? Let's start with the fact that the issue of a fair option price will be on the agenda for a long time. At the moment it is believed that it has been temporarily solved using the Black-Scholes (B-S) formula. The formula is presented in some assumptions and assumptions, which are the “birth trauma” of this theory. But as they say: “If you are so smart, where is your money?” If you don’t like it, come up with your own. Our task is to learn to use what we have. I won’t analyze the BS theory in detail here, there is a heap of smart literature for that, you’ll find it yourself; Google hasn’t been banned in Russia yet.

So: the Greeks are the variables in the BS formula that are responsible for the dependence of the theoretical option price on one or another uncertainty. In total, the classical BS theory identifies the following Greeks: delta, gamma, vega, theta, rho. Let's take a closer look.

3.2. Delta.

The first variable is the dependence of the theoretical price on the value of the underlying asset. Delta shows how much the theoretical price of an option will change if the price of the underlying asset changes by 1 point. The concept of delta can also be given for the underlying asset itself – futures on the RTS index. The delta of a futures contract is always equal to 1. The delta of an option changes nonlinearly when the price of the underlying asset changes. There are three states of the theoretical price of an option relative to its strike and the current price of the underlying asset.

The option is at the money. Designated “ATM” - at the money. In this case, the underlying asset is traded close to the option strike. By how much - well, for example, plus or minus 500-1000 points for options on the RTS index. For this state the delta is approximately 0.5.

Option "in the money". Designated “ITM” - in the money. Let's say there is a Call option with a strike price of 135,000. The underlying asset is trading at 140,000. This option is “in the money” at 5,000 points. The delta of such an option is approximately 0.7. If at the same BA price we consider the Call option with a strike of 120000, then it will already be deep in the money and its delta will be equal to 0.95, i.e. such an option will behave almost like a futures when the price of the underlying asset changes.

Out-of-the-money option. Designated “OTM” - out the money. Let the underlying asset be 140,000, as in the previous example. Let's take a Put option with a strike price of 135. An out-of-the-money option at 1 strike. Its delta will be approximately 0.3. If you take a Put with a strike of 120,000, it will be out of the money by 4 strikes and its delta is approximately 0.05.

While giving examples of delta values, I kept using the word “about.” Why can’t we calculate the delta accurately, the meticulous reader will ask? It is possible, but not in this life :)! The world in general and the world of options in particular is imperfect; one uncertainty affects another.

The BS formula contains a second Greek - the dependence of the theoretical price on volatility. It's called Vega.

3.3. Vega.

This “Greek” shows how much the theoretical price of an option will change if volatility changes by 1 percent. Oh how! This is where the first option joke awaits us. Volatility, in the sense in which it is included in the BS formula, cannot be measured. This is the so-called IV – impliedvolatility or “implied” or “option” volatility. For this entity, the definition “try on this - I don’t know what” is suitable.

Let me explain. Usually we always solve the so-called “direct problem”. When there is a formula for the dependence of a quantity on a factor, then we measure the factor and calculate the value of the quantity. It's not like that here :).

The task boils down to the following: using the available buy and sell quotes in option books, at various strikes and the current underlying asset, calculate IV values at various strikes that would most accurately match the BS formula. The methodology is given in the exchange document http://fs.rts.ru/files/5562/.

Here I will immediately write about the dangers, examples of which are drawn from personal experience and thematic forums.

Danger.

Suppose you have a certain “Grail”, using which you want to become the second Buffett. The Grail contains options that are located quite far from the underlying asset being traded, for example, a strike of 4. If you look at the options trading terminal, you can see that the bulk of options transactions take place in the range of plus or minus two strikes from the price of the underlying asset. If we move 4 strikes to the side, especially in terms of “in the money” options, we will suddenly find that offers to buy and sell will have a difference of more than 1000 points, instead of the usual 30-50 at the ATM strike (we get used to the terms J). Or there are no adequate orders in the glass at all, it’s “buy at 100” and “sell at 100,000”.

Well, let it be, we have the “Grail”, and not something else. We set a sell quote just below the theoretical exchange price (we want to be guaranteed to sell in order to complete the “grail”) and look at the result. The result will be strange. After 3 minutes (the time the exchange recalculates the theoretical price), the theoretical price will become lower. There is no one else in the order book and we will move our sell order even lower. Again it did not come true, but the theoretical price again fell below our request. This can go on for a long time.
In the end, your “butting” with the theoretical price and the exchange’s IV calculation methodology will attract the attention of a certain robot, which is engaged in its assessment of the fairness of the current distribution of purchase and sale orders at all strikes, depending on the IV and the price of the underlying asset. In an empty glass, we ourselves, with our orders, lowered the theoretical price of the exchange below a reasonable limit. The robot will satisfy our request for sale and, most likely, the price will be very unprofitable for us.
According to a similar scenario, events developed for one of the participants, who thus lowered the price by 5,000 points and received a subsequent loss. If you have an automated algorithm, restrictions against such situations must be included. The exchange's methodology for calculating the option volatility curve has similar vulnerabilities.

Let's continue about Vega. Personally, I am not into pure volatility trading. Those. I'm not trying to sell something at a high IV and buy it back at a low IV. I view IV as a kind of nuisance, which we will fight by having additional money on deposit. More about real trading recommendations later.

3.4. Gamma.

At its core, Gamma is the second derivative of the price of the underlying asset. Those. This is the rate of delta change when the underlying asset changes by 1 point. In terms of qualitative behavior, gamma has an extremum near the strike. This is where the rate of delta change is maximum. This Greek is used by advanced options traders to build optimal designs and portfolios for them.

3.5. Theta.

The fourth Greek is Theta. It is also known as the “temporal decay rate.” In our vernacular translation, this means how much money the theoretical price of an option will lose per day. In the BS model, theta is inversely proportional to the square root of the time remaining until expiration. Those. theta grows nonlinearly toward expiration.

Practice.

In practice, theta and vega at the ATM strike become equal to each other approximately 2 weeks before expiration.
Approximate values of theta strikes ATM, 2-3 weeks before expiration, volatility about 30-35 and the underlying asset 135-140000 will be 95-110 rubles/day.

All “Greeks” are usually displayed in any more or less decent trading brokerage terminal. For calculations, the brokerage system can use IV values supplied by the exchange or it is possible to enter your own value.

The last "Greek" is Ro. This is the rate of change in the theoretical price of an option from the value without the risky interest rate (alternative investment). In the IV calculation system adopted by the exchange, the value of this rate is zero. In short, we honestly forget about this Greek and forget about it.

Binary options attract traders with the opportunity to make quick money. You can start trading options with minimal investment. The initial deposit of most brokers is from $100. There are companies where you can start with $5 or $10. The profitability of this instrument is from 60 to 90%. This means that a bet of $10, with a contract yield of 80%, corresponds to a profit of $8. Considering that the transaction time can be several seconds, it becomes obvious that binary options are an extremely profitable type of trading. In the article we will cover the topic “Binary options trading for dummies”, that is, basic knowledge of BO trading for beginners.

Options for dummies - what to do and how to work

Binary options are a contract whose underlying assets are currencies, stocks, commodities and stock indices. This type of contract is concluded for a certain time. The expiration date of the option is called the expiration date.

There are two types of simple options. If the price of the underlying asset is expected to rise, an option is purchased.
If the price of the underlying asset is expected to decline, an option is purchased.

Despite the apparent simplicity of this tool, you must have basic knowledge of how to use it to assess the market situation.

Beginner traders are not recommended to use complex strategies, cluttering their charts with all known indicators. It is worth taking one simple strategy as a base and bringing trading to automation. Signals for opening a trade should be clear and undeniable. In this case, compliance with the rules and principles of capital management is a prerequisite.

The next basic rule is the recommendation - do not open transactions based on someone else's opinion. There is a large volume of analytical materials on the Internet; experts and analysts publish their forecasts. But there are so many people, so many opinions. At the same time, you can find radically opposite forecasts for the same asset on different sites. Of course, it is necessary to analyze the situation on the market, but it is better to rely on facts and statistics published in leading economic publications. Analytical materials that help to understand the nature of the movement of a certain instrument, its correlation with other market instruments, and reaction to fundamental events will be more useful than studying hundreds of forecasts and predictions.

Novice traders mistakenly believe that it is easier to trade on small time intervals, and the temptation to “disperse” the deposit as quickly as possible leads them to trade options with minute or even second expiration dates. But such short-term trading requires a lot of stress and sufficient experience. At small time intervals there are a large number of false signals - “market noise” due to increased volatility. For beginners, it is better to choose trading on time intervals H1 (hourly), H4 (four-hour), D1 (daily), respectively, expiration dates H4, D1 and longer. Of course, the number of transactions will be several times smaller, but the quality of trading will be higher.

1. Understand how options work. Watch the Presentations, Free Course on Options, articles from the “Options Management” section, read the recommended Books. Understand that options are a derivative financial instrument. Understand all the benefits and risks of options trading. 2. Volatility. Understanding what volatility is and its impact on options is also necessary for an options trader. Volatility is one of the most important factors in option pricing. Choosing an option strategy...

The expression “Most options expire out of the money” means that most option buyers end up losing. Is this true? I recently listened to Andrey Kuznetsov’s webinar “How to sell options on the world’s commodity markets” and was a little surprised to hear several myths about options from a person who has been in the market since 1995. It should be noted that these statements are repeated periodically, from year to year, on various...

Today we are reviewing another training from the options series for beginners - Sergei Eliseev’s course on the ABCs of options trading.

In just 3 days you will gain the most useful knowledge on options trading.

This webinar is designed for beginners in options trading.

Let's go over the terminology of option trading from a practical perspective.

There are marginable and non-marginable options. Until 2008, there were non-marginable options on the MICEX, which were all successfully traded. In 2008, margined options appeared and there was a point in time when both types of options were traded simultaneously.

What is a non-marginable option? This is a contract for which variation margin is not accrued or debited, i.e., for example, you bought one PUT option for 1000 rubles (1 point = 1 ruble), accordingly, 1000 rubles are debited from your account and there is no guarantee collateral (GO). Variation margin is not charged. Suppose this contract has risen in price to 3,000 rubles and you decide to sell it. They sold it for 3,000 rubles. Accordingly, they received 3,000 rubles into their account. Another situation with selling: let’s say you decide to sell this option for 3,000 rubles. The premium of this option of 3000 was credited to your account and some part of the GO was blocked.

There are a lot of pros and cons to these two types of options.

The advantages of margined options (or, as they are also called, futures-type options): variation margin is accrued and written off daily, this allows for a significant reduction in the guarantee coverage for sold options.

Options are also divided into American and European types. American-type options are traded on the MICEX. An American-style option can be exercised at any time before the option expires.
A European option can only be exercised on the expiration day.
In the vast majority of cases, there is no need to submit an application to exercise an option before the expiration date of this option, and as a rule, options expire automatically.

One important point regarding the expiration of options. Some brokers have implemented the functionality of automatic execution of an option if the option is at least 0.1% in the money.

For options trading on the Russian market, we recommend one of the leaders in this industry

The material is presented in a very accessible language. We recommend it to anyone interested in options, especially those starting out in options trading.

Let's dwell a little on lecturer Sergei Eliseev: