Have you been under the impression that your pay-out would vary after the stock price exceeded the pre-determined strike price? Well, if you were, you’re wrong,because in this case, the pay-out is fixed. The amount counted as the pay-out was determined while the contract was being decided. Hence the price fluctuation of the underlying asset will never matter to you.
Whether the underlying asset is going through a bad or good phase the ultimate amount that you will get is predetermined. In the case of digital options you are the winner if the price of the stock moves in the direction you had predicted. If you have opted for it, the risk factor is definitely reduced.
Many investment specialists suggest digital options to those who are new to the business or have suffered major losses before. It is the kind of option that is also known as the binary option where there will never be a constant payoff.
Let’s Understand Digital Options
Steve purchased shares in IFM Investment Ltd for 2.09 USD on October 3rd 2014. The company is a renowned real estate service provider and has been an exclusive franchisor in the Republic of China. Steve had gone for digital options opting to earn a fixed payoff or nothing at all.
IFM’s stock struck at $2.09 with a binary payoff of $100. This type of option also has a date of maturity. Now, if on that date, the stock is trading at or above $2.09, Steve will receive $100 as his payoff. If its stock is trading below $2.09, Steve will receive nothing.
Binary or digital option contracts of a particular company are sold directly by the issuer to the buyer so no third pay is involved in the process. Unregulated binary options are never encouraged. In fact, in the USA the Securities and Exchange Commission and the Commodities Futures Trading Commission have strict rules in place regarding its regulation.
This binary option is quite popular on the American stock exchange as well as the Chicago Stock Exchange but is called by different names. In the American Stock Exchange digital or binary options are known as a ‘Fixed Return Option’. The stock exchanges limit the binary option offer to some of the stocks, curtailing the manipulation of single stocks.
Who Can Make This Kind Of Investment?
This kind of option doesn’t require any knowledge or regular study of the stock market and therefore attracts people without any expert knowledge of the market place. But there are people who don’t take the task seriously due to the relatively small risk involved. The purchaser has the advantage, as the payoff is a known constant.
What Are The Associated Pros And Cons?
If traders want to maximise these binary options they need to keep a few important points in mind. These options are known as ‘exotic options’ and a trader should not lose focus at any time. Binary options will expire on a fixed date similar to the pay-off amount. This expiry time is also known as the ‘strike price.’ The trader needs to be on the correct side of the market and to be alert at the time of the expiry.
Whenever the trader feels prices are falling, he should buy a ‘put’. In this way he will strike the right note at the right time.
The secret is to get as much information as you can from credible sources. The biggest advantage of these options is that the trader or the purchaser makes the final call. He is the one who has the right to say yes or no – and hopefully the skill to say it at the right time. The trader can study the current market situation and make decisions accordingly. He needs to evaluate what is happening in the world market trends and draw conclusions based on this and his ability to predict movement on the stock markets. An effective study of the market can help him fix the right payoff amount during the contract creation. Markets change but an affective strategic plan of action can make you a winner.