Whether you’re just getting started or have been trading for years, the single most important aspect of your trading career is knowledge.
And when it comes to your money, jumping into anything without thoroughly understanding it is a mistake that you don’t want to make.
Now this month, you’ve been asking me about a certain “all-or-nothing” option – and if it’s something you should really spend your time and money on.
So I’m going to give you the truth right now.
And it may surprise you…
To Trade or Not to Trade Binary Options (And Much More)
Today, we’re going to talk truthfully about binary options. But before we do that, I want to answer some of your other top questions this month.
So let’s jump right in…
Q: TD Ameritrade denied me Level 2 clearance for options. Do you know a broker that might be more flexible?
Now I can’t actually tell you what broker to use – that’s something you’ll need to determine yourself. But this is a list of highly-reviewed brokers that trade options:
Keep in mind that these are different – meaning you’ve got full-service brokers like Charles Schwab and interactive brokers that are great on execution but difficult to reach if you have a question or need help. Other brokers can fall somewhere in the middle where the executions are great and you can call for help – Options House is an example of a broker that falls in the middle – also gives level two clearance.
The other thing you can do is tell a broker that you’re a Power Profit Trader and are learning about loophole trades and spreads- and that you know spread trades are actually lower risk trading strategies when done correctly. Your broker may change his or her mind on giving you level two clearance.
Q: Would you by regular shares or options of GLD? If options which types would you recommend?
A little while back, we talked about SPDR Gold Shares (NYSE: GLD). Right now, GLD is trading between $125 and $130. The thing about this type of ETF is that volatility moves higher as the price moves higher – unlike a regular stock where volatility goes up and the stock goes down. These are almost commodity based – meaning their volatility increases as prices increase.
And that means it could get expensive to buy options. This is why spreads might be the better option for you because you can spread the cost and the risk.
Q: Did you use the price/volume/open interest chart to decide your trade actions immediately following the Brexit results?
Absolutely not. I looked at implied volatility charts. These charts tell me how nervous traders are. The more nervous they are, the higher that implied volatility goes. And as that implied volatility , the price range expands – which makes some great options strategies.
When there’s absolute craziness going on in the markets, you almost have to take a step back and look at the implied volatility on options to get an idea of where the range is likely to hit in the future.
Q: How is shorting a stock less risky than going long?
It’s not. In fact, here are some risk graphs to look at:
All of the ones at the top – long stock, long call, and long put – have limited risk down to zero (including the stock). But for the ones at the bottom – short stock, short call, and short put – you’re going to make money as the price goes to zero. However, keep in mind that the price could very well increase to infinity – leaving you with unlimited risk.
Now a short put does have a limitation of risk, but most people don’t know how to trade it and will leverage up far more than what they have in their accounts. So their accounts are dried out long before that risk falls to zero.
Now I’ll combine these strategies, like creating a spread, to minimize that risk and cost. But shorting a stock is far riskier than going long a stock.
Q: If you’re expecting the underlying stock to stay within a narrow trading range for about 2 weeks, is it better to sell-to-open an option with only 2 weeks left, or instead sell-to-open a 3- or 4-week option with the intention of closing it out by no later than 2 weeks?
This is just me… but I look at two things in particular:
- When the seasonal trade ends: By looking at the end date of the seasonal trade, I can get an idea of what expiration to use.
- What the average price move is for the trade: Using the average price move, I can get an idea of what strike price I want to use.
Now if you’re not using something like seasonal trading and are instead using something like technical analysis, then you’re going to have to do the work yourself. For example, if you’re following channels, you’re going to want to look at how far that channel will need to go to get your price target. Look for your target price and look for the time frame it will take to get there to help you decide on which option to buy.
Q: What do you think about binary option robot systems, and do you have any advice on how to win trades when using them?
This is probably the single-most asked question I receive all the time. And honestly, while I’d like to trade them, I’m just not going to.
There’s not enough volume in binary options that makes them efficient options. To me, trading binary options is almost like going to Las Vegas and placing a bet where I have to pay for the bet itself AND the privilege to place the bet. And for me, that’s just too much…
We already have to pay commissions and slippage in this business, and we’re in a market with a lot of players. But binary options just don’t have a lot of players, especially in the U.S. That’s why I tend to avoid them and would suggest you do the same.
Here’s Your Trading Lesson Summary:
When it comes to binary options, there’s simply not enough volume to make them efficient. Aside from the fact that binary options traders in the U.S. are far more scarce, you’ll end up paying far more than you would for standard options. So when it comes to trading them, my opinion is to stay away…
Until next time…