Noob on the steep learning curve of options trading

coere

Hi I am new to option trading and new to the binary option forum
I have watched and read endless content to get me head around how option trading works
I have started to dabble in my trading account and will only see results ()+ or -) at the start of March

One question that has bothered me and I still have no clear external confirmation of my assumption
That is the fate of the options on settlement day. (expiry day)

If I have sold (written) an option and it is in the money at expiration, I am assuming that my brokerage account will settle the outstanding cost to me automatically. I.e. my account will be debited the option strike -+ the actual price of the underlying security x the muliplier x how many option units I sold.

ex.
Put strike 102
Underlying security price at expiration = 100
I option bought with a multiplier of 100

So 200 will be deducted from my account and transferred to the buyer/holder of the option on expiry day.

And conversely if I bought options and they come into the money, the funds from the seller will be transferred to my account respecting the same calculation as above.

So if I trade options and plan is to hold these positions till expiration, then I need not do anything with them. Allowing things to expire will trigger the settlement either as a debit or credit to my account depending on the result on expiration day.

That would mean that the fees charged by my trading account will only be incurred at the time I take out my trade position.

Is my understanding correct?
Would love to hear others opinion.

Thanks and hope to be a contributing member to this forum in the future.

Blue Sky Binary

Hi Coere,

Welcome to the forum. Your analysis above is largely correct however please note that this forum is for binary options; where there is no underlying. There is time value, but no intrinsic value per say. Time decay does occur and if you early close a binary option you can recover a certain cent on the dollar, but these binary options are just directional bets with no influence on the underlying when the actual transaction occurs (a buy or a sell). There is no overnight carry or transaction fee. Some binary brokers are moving towards a flat transaction cost per entry which is debited immediately upon position entry but that's not mainstream.

Simply put, you are trading American style call and put options, which are real options. Binary options are synthetic. You may be better served on a proper options trading forum.

Hope that helps,
Team BSB

coere

Hi BSB,
For the first part of your post I am thinking that this is exactly what I am doing. I am not buying or selling shares or positions in any security. I am trading options on said securities. Apart from my trades contributing to some secondary indicators of how short or long said security is, I do not think I am in any way influencing the underlying security.
Though as your post ends you claim I am...

Blue Sky Binary said:

trading American style call and put options, which are real options. Binary options are synthetic.

I guess I am in the wrong place.

If I may trouble you just a little: could you please explain to me the difference between real options and synthetic options?

Blue Sky Binary

Hi Coere,

You are not troubling us at all, this is why we are here, to answer any questions that we can

You are 100% right, even in the classic options you are trading, indeed at expiry when time value = 0, the positions are usually netted off at your options underwriter. I'm assuming you are not writing any, you are simply purchasing a call option or a put or some basic strategies like straddle. The underlying price of the asset is very marginally affected but note that for example, if a deep OTM call comes into the money with time value remaining, this gives the owner (who is paying the premia) to actually exercise it, which means the underwriter then needs to actually purchase the underlying which would move its price up (in theory).

With binary options, say you are long or CALL EUR/USd, with expiry in 60 minutes from now and the price moves in your favour, there is nothing you can really do, as in you have no right to purchase the underlying (i.e buy euros or sell dollars). If you did, then it would be a proper call option. In this binary option you just wait till expiry and when it expires you get 80% of ROI on your x investment including your investment back. If you lose, even by 1 micropip, you lose the entire investment. It's synthetic in the sense that for example in the real options market, if there was a $10bn position on FB stock calleable at price x and the option went ITM, the owner of the call could exercise their right to buy facebook stock at whatever strike that was agreed and this action itself would trigger actual buying pressure on facebook shares. In BO none of this happens.

Binary Options are dumber, very simplified instruments and have no real world value. Banks or institutions cannot securitize them and this is why no dealing desk a book or b book will take on any exposure. Hence no presence of market makers.

Finally, note that Binary Options is a misnomer, they are not options as they do not give the owner the right/nor obligation to purchase or sell the underlying at maturity. They should therefore be called Binary Outcomes. but in this industry people use marketing ploys to give the asset more credibility.

Does that make sense?
Team BSB

coere

BSB, thanks so much for the time to explain this to me in this detail. That is a great answer and I feel I have made a great step forward up my learning curve.

So I guess that only specialist trading platforms deal with these binary options? Apart from here I have never heard of them.
I see some on the homepage of this forum, they are even showing those that are relevant for my location (Switzerland) but if I switch the filtering off, the same suggestions are offered me. So I am guessing they are all based in London or US.

Blue Sky Binary

Hello Coere,

No problem at all, glad it helped.

Yes indeed, these platforms, are listed under the 'Binary Option Brokers' section of this website at the top. Most of them are based in Israel, Cyprus and some in Asia.

We strongly suggest starting with a demo account and if you are going live, start small, around $200-500 and if you know how to trade, you will be able to grow that to a sizeable amount. If any account manager at those brokers offers you advice to deposit more or trade something, ignore it.

kind regards,
Team BSB