In short, the risk assets are assets with an unknown future returns. These assets usually have returns that are not the same across the time. The price of risky assets is highly dependent on the dynamics of market conditions. As a rule, risk assets are shares and securities, the rate of which varies greatly.
Also, that rate of return is greater usually than the interest rate on safe assets, to compensate traders for the risk. In stocks these returns are dividends which are not fixed. In other assets, returns depend on the price of the asset. With binary options trading, buying an option that is based on an underlying asset which is a risk asset, traders can convert the variable returns into fixed returns.
Binary option will pay mostly around 85% return rate on investment if the risk asset moves in the right direction. It does not matter how much it moves as long as the predicted direction equals the price move. This makes it easier to have an idea how much will one get if the call on the underlying asset was correct and dependence on price itself, for the rate of return is less pronounced.
What are Risk Assets?
In order to better understand what is a risky asset, let’s sort out what exactly is an asset as a whole. An asset is a source that provides income to the owner. It can be an apartment, where renting brings a monthly income, and may be the company’s stock, for example, the automobile giant Toyota. What’s the difference? In the case of the flat likelihood that the owner will incur a loss is much less than what he will receive an income. And the size of earnings is known in advance, and even the date of receiving the money. Stocks are harder, their owner never knows in advance if he will receive income and when, plus there is always the opportunity not only to make a profit, but also to suffer losses. That’s what happened with the holders of the Japanese company Toyota shares after explosions at nuclear reactors in Japan stopped the production of cars of this brand around the world.
What can we say about the risky assets and binary options? Since the main feature of trading binary options – the ability to make profit from even the fall in the value of the asset, if you correctly predicted the fall, most people, buying shares on the real exchange gain in addition a binary option predicted decline in the value of shares (this is called hedging). Thus, if the value of an asset will rise, having the stocks you make a profit (dividends), but even if the stock does not rise and fall in value, having the binary option (it is important to remember that the yield of binary options is very large: 65-91%) investor will be able not only to cover losses after falling stock price, but also get additional income, while others are counting their losses.
Profit from Binary Trading in Financial Crisis
For many traders actually, trading on the stock exchange, crisis and the fall in commodity assets can cause a lot of trouble, and often bring considerable financial losses. The question is: in a situation of total economic instability, when much of the EU countries are on the brink of bankruptcy, the U.S. economy can not go on the amendment, and the Asian markets suffered significant losses due to the recent earthquake, does it make sense to play on the exchange? How do we make profits during the crisis?
Binary options trading allows investors to earn the same as in a booming market, and in the moments of its collapse. How is this possible? In binary options trading, investors are invited to make a prediction where the price of their chosen asset will go up or down. Thus, the correct forecast of the drop in the market can make the exact same percentage of the investment as well as the rise in the market, and this is not a small percentage – up to 85%. In the crisis, when asset prices generally fall, traders can profit from these moves by betting against a price rise.
Beneficial Crisis Strategies
Cyprus debt weakened euro – let’s make money on this!
Here is a typical situation in which binary options have a huge advantage over the usual trade on the exchange. Binary options traders make profit even when the market is collapsed and other traders suffer losses.
Let’s analyze the situation:
After Fitch rating agency on Thursday downgraded the credit rating of Cyprus, it was clear that all of us will see big changes in the financial markets. But while people desperately look for a way to save their investments, put at risk because of the situation with Cyprus, binary options traders gleefully rub their hands in anticipation of the big and easy money.
Why are binary options trading particularly cost-effective in a crisis?
First of all, when the world market touches with something bad, it is impossible not to know about it. All people listen to the news, newspapers write about the crisis, experts discuss it. And, most importantly, people discuss not only the event itself, but also its future implications – what happens in the financial markets in the near future. This is the key information that we need to bring profits from binary options trading.
For example, let’s take the situation with Cyprus – it is clear that high debt and credit rating downgrading of the EU country will have a negative impact on the euro. Thus, it is logical to assume that the euro will fall soon – that is, binary options traders will buy put options in order to make profit.
How to double your profits?
Anyone, even a newbie trader, knows that currency pairs, stocks, indices and commodities are related. How can it help us to double the profit from binary options trading? We know that the euro will fall soon. It is logical to assume that the dollar will rise. What will the dollar affect? First of all, the dollar influences the price of oil – as the dollar is higher, so the oil is cheaper. Translating this to binary options – we need to buy a put option (for a fall in oil prices) and this can bring you an additional profit.
Budget Management Strategies in Binary Options
Investment management in binary options is one of the most important components of a successful strategy in binary option trading. Just like in our daily lives, a reasonable cash management is very important in trading. Binary options are positioned in the market as a simpler version of FX trading suitable for beginners and professionals, as well as providing an opportunity not only to trade currencies, but other exchange of assets also – stocks, indices and commodities.
But in spite of such differences and simplicity, binary option trading requires a strategic approach to the process and discipline. With the ability to get a quick result, binary option trading has a major threat: such a tempting opportunity as quick profits can easily drown out the rational approach and then the emotions and excitement are sure to prevail.
Some more money management articles from our Academy section:
Here is another tip to help you develop your own strategy for binary option trading and money management when trading:
When you start trading, never risk more than 50% of the available capital. So after the binary option will bring your first profit – share it in half: 50% set aside, and 50% invest further in trading. This way you will always have to take profits, which will remain with you, even if the next trade will fail, but at the expense of the other 50%, you will gradually increase the amount of your investment in proportion to this your payments for winning options will increase.
On the one hand, applying this strategy to trade, you will earn less than you could, putting all the money earned in a turn, but on the other, which is very important – using this strategy, you minimize your risks and you will always have capital with which you can continue trading.