American option: concept, definition, features and types of options

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Trading in the financial markets is gaining more and more popularity every day, and many Internet users see it as an opportunity to earn extra money. Beginning traders are increasingly attracted to trading with binary options. This type of trading allows you to receive a predetermined income within the agreed time frame, which the trader chooses independently.

American option compared to other types of binary contracts is in great demand among speculators. In order to profitably trade in financial markets, you need to be able to choose the right direction for opening a digital contract, know the patterns and rules of trading, observe and minimize possible risks. And also, when choosing an option, you need to take into account its features.

Option definition

For trading in financial markets, various instruments are used: stocks and securities, currency pairs, gold,oil, cryptocurrency, indices and other assets, among which are binary contracts.

An option is a specialized agreement on the basis of which the buyer acquires the rights to sell or buy any trading asset without any obligations in a certain time period. Any binary contact has an expiration time, that is, the duration of the contract. In fact, there is no buying and selling in trading. The trader earns on the forecast of changes in market quotes for the selected instrument.

The concept of a binary contract

To understand what a binary contract is, the article will give an example with an American option for clarity. Before choosing a trading asset, it is necessary to evaluate not only the advantages of the instrument, but also its disadvantages.

Pros:

1. The term of the contract, that is, the expiration time, is clearly indicated in the terms of the option purchase and is set at the option of the trader.
2. The profitability that a trader will receive if the transaction results are positive is known in advance before buying a contract.

Cons:

1. Difficulty in predicting when choosing a short expiration time.
2. Some brokerages have restrictions on simultaneous purchases of a large number of options, and therefore, in case of unsuccessful trading, it is not possible to use the hedging method.

Not every broker allows clients to open trades in different directions until the purchased contract expires. Most of them set limits that are notit is always convenient, especially if traders are trading Turbo options.

When choosing an asset, it is necessary to take into account its profitability. The fact is that at different times of the day it can change depending on the volatility of the instrument. If we consider an American option, then in the terms of the contract, the yield is known in advance, so you just need to choose the hours for trading when it will have the highest values.

Binary contract example

Digital option is one of the simplest and most understandable tools. To earn on it, you need to perform just a few actions:

1. Select a trading asset, taking into account the current profitability.
2. Set expiration time.
3. Choose the amount of the bet to invest.
4. After predicting the market movement, you need to choose the direction for opening a binary option and buy a contract.

Each contract has the following parameters:

1. Name of the trading asset.
2. Expiration time.
3. Bet amount.
4. Selecting the direction for the purchase of the contract.

Forecasting the market price is paramount to making money. For example, buying an "higher" option implies that prices will rise at the end of the expiration time. "Lower" - decrease in value.

Types of contracts

The choice of a trading instrument is one of the main parameters for making money in the financial markets. Novice traders often face various problems when choosing an asset. Therefore, it is very important to learn how to correctly assess the market situation trading tools.

Separation of options into groups:

• purchase and sale agreements;
• urgency and expiration period;
• for trading assets.

To understand which instruments are suitable for a trader, American, European or Asian options, you need to know their characteristics, parameters and features.

It should be noted that all contracts, depending on the expiration time, are divided into three types:

1. European options - ends after expiration.
2. Asian contracts - the price at the time of purchase of the derivative is unknown and is calculated from the average value of the asset until the expiration date.
3. American options - have no restrictions and are exercised at any time before the expiration of the transaction.

Varieties of asset options

When choosing a trading asset, it is also necessary to take into account that all contracts are divided into categories by instruments. That is, options can be used in various markets: Forex (currency pairs), stock markets, crypto exchanges, trading in commodity assets.

Distribution of options by underlying assets:

1. Currency agreement.
2. Stock contract.
3. Commodity option.
4. Interest agreement.

Before you start trading options, you must carefully readparameters and features of each instrument.

American treaty

This type of options is the most popular tool for traders. To use it in trading, you need to know what it is. The American option gives the owner the right to buy or sell any underlying asset, without any obligations, at a price agreed in advance in the terms of the contract, at any time before its expiration. Such a tool is great for beginners, as it is the simplest and most understandable type of options. The demand for American Option among traders is quite high, and therefore it is available in almost any brokerage company.

Experts and specialists have developed many different trading strategies that are great for American contacts. Trading methods are based on a wide variety of tools: technical indicators, graphical constructions, as well as automated programs for trading this instrument.

American option: myths and reality

Among novice traders, there is an opinion that it is generally unrealistic and impossible to make money with binary contracts. However, statistics clearly show that options do work, but only if the required conditions are met.

Professionals advise beginners to carefully study and analyze market movements before starting trading, familiarize themselves with the tools and choose for themselvessuitable, and only then start trading.