Risk Assets and Binary Options

Risk Assets and Binary OptionsMarket forces can and do produce volatile price movements. You have been given examples of this in other articles. These volatile assets whose price rapidly rises or falls are called risk assets, partially because they are moving unnaturally and at some point in time they will correct themselves by suddenly reversing their trend. That is why they are considered risky, if you trade on the assumption that their trend will continue, then you will lose on that particular binary options trade when it suddenly trends in the other direction.

It is these unknown future returns that make these assets become risk assets. Risk assets are controlled much more by changing market conditions as opposed to normal buying and selling. Ant type of asset that is traded has the ability to become a risk asset at any point in time.

Let’s try and get a better understanding of what risk assets are as opposed to normal assets. Normal assets are a market source that can be turned into cash because they have value. Not unlike a person’s other assets, such as a house, car, bank account or jewelry; the amount of value a market asset has can go up or down based on its current market price.

The biggest difference between a person’s normal assets and market assets is that when a person goes to liquidate a normal asset, they will get the agreed on price from whomever they are selling it to, thus they will know exactly how much they are getting and when. A market asset is not liquidated so simply; the price may change drastically in the short period of time between when you decide to liquidate the asset and the time the actual sale takes place. All this is what makes a market asset harder to put an exact value on because the market is constantly in flux. A market asset becomes a risky asset when it’s trend and price become very unpredictable.

So how do risky assets relate to binary options trading? We have said several times that one of the benefits of binary options trading is that you can profit when the market price of an asset trends upward or downward; this is unlike holding shares of market assets because you can only profit when their price is trending upward.

A lot of people will use binary options trading as a means to hedge their trades so they do not lose everything on a bad trade. This is especially common with risky assets. An example of this would be a person buying a lot of shares of IBM and then placing a binary put option in the event the asset share price trends downward. This allows the trader to recover at least part of their losses.

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References and Further Reading:

1. Group based trading methods (K Sander – 2012)

2. Foreign Exchange Joint Standing Committee E-commerce Subgroup Report (P Fisher – 2003)

3. Terminal for trading on the exchange markets (IV Kligman, SV Migalev – 2010)

4. Detecting nonlinear dependencies in foreign exchange markets: A multistep filtering approach (S Bekiros – 1998)

5. High Frequency Trading for Gold and Silver Using the Hilbert Transform and Event Driven Volatility Modelling (A Kablan, J Falzon – 2014)

John Miller
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John Miller

John has worked in investment banking for 10 years and is the main author at 7 Binary Options. He holds a Master's degree in Economics.
John Miller
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