Everything You Need to Know About Bitcoin Based Binary Options Trading

In the year 2008, two major innovations entered the world and changed how we looked at finance. One of these was the binary options trading industry and the other was an online currency called bitcoin.

What is Bitcoin?

Bitcoin is simply a digital currency. There is no physical entity of bitcoin, but rather balances that exist on a public ledger that is encrypted with both private and public keys. Bitcoin was created as a way to facilitate online payments without using a centralized authority. The decentralized nature and the anonymity offered by bitcoins have made this form of currency quite popular.

What is Binary Options Trading?

Binary options trading involves a yes/no trading platform designed to have a payout of a fixed amount. Simply put, a trader in the binary options market will decide whether a certain asset will go up or down in price over a fixed amount of time.

Bitcoin Binary Options Trading

Some innovative brokers have sensed a new opportunity in the trading market and have come up with different ways to trade binary options using bitcoins. Essentially, there are two ways that bitcoins can be traded on the binary options market. The first way is to use bitcoins as the medium of exchange. The second way is to use bitcoins as the underlying asset.

To use bitcoins as a medium of exchange a trader will trade the various underlying assets of the financial market using bitcoins. For example, a person may trade the Euro/USD currency pair and call for it to rise or fall during the specified time frame. If the trade is successful instead of being paid in a standard currency such as the Euro or U.S. dollar they will be paid in bitcoins.

The other option for trading bitcoins is for it to be used as an underlying asset. Bitcoins are traded on specialized exchanges and just like the euro or the U.S. dollar the exchange rate for bitcoins goes up and down in accordance for the demand for them.

For example, in the year 2013 the Cyprus banking crisis led to many losing confidence in the Euro. This led to many investors switching their wealth from the Euro to Bitcoins. During this time the sudden demand for bitcoins pushed its value up so that it was almost equal to the price of gold. The volatility of bitcoins is what lead to many binary options brokers offering binary options contracts tied to the value of bitcoins. To put it simply, bitcoins can be traded just like any other type of underlying asset that is listed on a binary options brokers’ platform.

Why Use Bitcoins?

Many people may be wondering why they should consider being paid with bitcoins for their binary options trades. One of the biggest benefits of bitcoins is that the cost of the transaction will be lower than any other form of online payment. Another reason to consider bitcoin is because it allows you to earn extra bitcoins. Since bitcoins are traded and the value fluctuates based on demand, as a trader you can shield yourself from these fluctuations by earning more through the profits earned during your trading.

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Top Selling Books on Stock Options

Have you heard about the huge percentage gains you can make from stock options but didn't know where to start? Or maybe you heard about option writing to increase your income from your investments. If so, check out these books on stock options.

The Ultimate Guide to The World of Options Trading

The Options Playbook, Expanded 2nd Edition: Featuring 40 strategies for bulls, bears, rookies, all-stars and everyone in between.

Options Trading Successfully for Beginners

Proven Option Spread Trading Strategies: How to Trade Low-Risk Option Spreads for High Income and Large Returns

Simple Option Trading Formulas: Step-By-Step Strategies Used By Elite Option Traders

Stock Tip of the Week: Short Puts

It may sound strange but shorting puts can be one of the safest ways to invest. Put and call options are ways of speculating on the price movements of stocks providing much greater percentage returns (and percentage losses). A call is the right to buy a stock at a particular price within a particular amount of time. The call purchaser hopes that the stock will go up and if it does, the percentage gain will be far more than if just the stock is purchased. If the call is not exercised by the expiration date, the call expires worthless. If you sell (short) a call and you own the stock, if your stock doesn't get called and the call expires worthless, you get to keep the proceeds, the premium, which is a way of generating income, or additional income if the stock is already a dividend payer, on the stock. Options are traded on a per share basis but representing 100 shares. In other words, If a call option is selling for 3.75, it means that the option cost would be $375 and it would give the buyer the right to buy 100 shares.

A put is the reverse. It is the right to sell a stock at a specific price within a particular period of time. Often, owners of a stock buy a put to protect them on the downside. There could be several reasons for this: postponing a capital gain to the following year, uncertainty about upcoming earnings call, belief in a potential market drop. Another reason to buy a put is to speculate that the stock will drop; an alternative to shorting the stock. However, the seller of a put is hoping that the stock will go up and the put will become worthless. If the stock drops, the price of the put will increase and the trader who shorts the put would lose money but would lose less money than if the stock was purchased.

This is where an overlooked trading technique comes in to play. Let's look at a hypothetical example. Suppose XYZ stock is trading at 21 a share. Assume that a one month put with an exercise price, or strike price, of 20 is selling at 1. The buyer of the hopes that it drops significantly. If the stock drops to 17, the put buyer can buy the stock at 17 and 'put' it to the seller of the put at 20, for a 3 point gross profit or after the investment of 1, a net profit of 2, not counting commissions. Or as a simpler alternative, the put would be worth 3 points and could just be sold, for a 200% profit.

Now let's look at the seller of the put. If you are bullish on XYZ stock, you can buy 100 shares of the stock for 21. If the stock does nothing, you make nothing. If the stock goes up 1 point to 22, you make a $100 profit. if it drops to 17, you lose $400. Now here's the tip. If you short the put, and the stock does nothing, the put will expire worthless and you make $100. If the stock goes to 22, the value of the put drops to zero still expiring worthless, and you make a $100 profit. Now suppose that the stock drops to 17, the put is now worth 3, and since it was shorted at 1, it is a net loss of 2 or $200, a much lower loss than if you had bought the stock.

The alternative is that you could have had the stock put to you, meaning that you would be forced to buy the stock at 20. But you would still have been better off than if you had just bought the stock at 21. You end up buying a stock that you wanted, but at a dollar less per share, plus you get to keep the one dollar premium so your cost basis is actually 19. This on a stock that you were willing to pay 21 for. Therefore, the breakeven is 19. If the stock drops drops to 19, the value of the put is 1 which is where you shorted it at.

If you really want the stock, there are other ways to play the short put. You could short an at-the-money or slightly in-the-money put, giving you a greater chance of getting put to, and still capturing the premium on the option.

This technique has the advantage of time in your favor. The closer to expiration, the faster the value of the put depreciates. Now the disadvantages. Unless the stock is put to you, you lose upside potential. Also, not every investor is eligible to do this. You would have to be cleared for option trading and spreads by your brokerage firm before you will be allowed to short puts. Also, it is really a good idea to have some experience trading options before trying this.