Binary Options: Strategies for Directional and Volatility Trading

CHAPTER 4

Binary Options Contract Collateral

MARGIN AND DEBIT RISK OF VANILLA OPTIONS AND FUTURES

Unlike vanilla put/call options, binary options are fully collateralized. This means that regardless of whether you are buying or selling an option, you cannot lose more than you put up per contract on the trade.

When trading commodity or stock index futures without the use of binary options, the trader is trading on margin. When trading on margin, you are using a small amount of money to control a larger amount of an asset class. This means that if you are trading futures or options on futures, you can lose more than you put into the trade. In plain and simple terms, that can be scary, especially if you are holding positions overnight.

Trading volatility is trying to speculate on the magnitude of a price movement of the underlying asset within a certain time frame. When trading volatility, you are not trying to forecast market direction but simply the size of the move. In simple terms, you are speculating whether an underlying will stay within a certain range or trade outside of a certain range by expiration.

If you use vanilla put/call options to speculate on market ranges, you will be trading on margin. This means if the underlying makes a drastic move outside of the range that you predicted, you may lose more than you put into the trade.

One great factor of trading binary options is that your trades are fully collateralized. This means that you can never lose more than you put ...