Can anyone help me understand Options?

Beginner Questions
1

Hello, I am relatively new to the Forex Market and I am trying to go over some concepts in the babypips School of Pipsology course. In the “Binary Options 101” part of the course listed here: https://www.babypips.com/learn/forex/what-are-options they gave the following example:

"For example, let’s say you want to buy a piece of land that is currently worth $100,000.
You think it will rise in value by another $30,000 one year from now, but you don’t want to tie up $100,000 for a year in that investment.

The seller of the land offers to sell an option contract to you to purchase the land for $100,000 (strike price) one year from now.

The seller offers the contract at a $5,000 premium. You agree, pay the $5,000 to the seller for the contract and wait to see if the value rises.

Let’s say in one year, the land value increases to $130,000. You decide to exercise your right to purchase the land at the agreed price (the strike), pay the owner the $100,000 contract price and now you own the land.

Your profit on the land is the current value, $130,000, minus the purchase price (strike) plus the contract premium: $130,000 – ($100,000 + $5,000) = $25,000.

Alternatively, let’s say that in one year, the land falls in value to $80,000. You are not obligated to exercise the contract and you obviously decide not to buy the land because it has fallen in value.
Your only loss is the premium paid ($5,000) to the option seller. As you can see, options are a great alternative to play your market ideas with very limited risk."

I understand that the example above applies to an investor buying a call option. My question is, how would an investor buying a put option be applied to an example like this?

2

Stay away from Binary Options. Theres a good reason why they’re banned in a lot of countries.

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3

Call options allow the holder to buy the asset at a stated price within a specific timeframe.
Put options allow the holder to sell the asset at a stated price within a specific timeframe.

Man i copypaste from other website,

4

From your example, buying a put option(for $5K, when the property was worth 100K) would allow you to PUT the property to him at $100K. IF the property went down in price, he’d have to buy it from you at $100K. Likewise, it it went down to $80K, he could buy the put back from you at $20k; the one you paid $5K for.
Puts are exact opposites of Calls.
I don’t know anything about Binary options but options on stocks and commodities work that way. But they do expire worthless(thus the opportunity to buy/sell, NOT the obligation).

1 Like
5

Unfortunately (or fortunately???) this is one area that I’m all too unfamiliar with save for pure Vanilla Options i.e. from what I gather there’s so many different “flavors” of options that it’s just not funny. Somebody sometimes a long time ago tried to explain this lot to me but it did my head in so I decided to give it all a miss. I have heard it said in some circles though that Options are the only way to go (this as opposed to simply having one-directional trades with a binary outcome as is the case with most of us). And I know that Options are used as insurance on these one-directional trades as well. For sure something I’m a little bit sorry that I never delved into. But not about to go upsetting the apple cart now just for the sake of curiosity.

1 Like
6

the example above plays well in a real estate deal. for stocks, calls, its same, for outs its different.

in fact in a put option you are the seller. so let me give you an example.

you buy a put option (there in fact you sell a “buy contract”) the person who bought the buy option from you is obliged to fullfill it at the end of the contract.
#a stock for lets say 100 and you two agreed to deliver him 100 stocks at a price of 100 in 1 month.

now the stock falls by 10usd, the contract gets fullfilled, you sell him the 100 stocks for 100 as agreed upon and you purchase those stocks in the open market for 90, your gain is 10+ the premiums on the out option contract. (the 5000 which you stated in your example).

options are either in the money or out of m´the money. you want to find the ones which are out of the money but have a realistic chance to go in the money.

such options can be bought for 1 usd or even pennies, but once they are in the money (depending how much the stock advanced, or declined in a out option) you option can be worth 2-50 usd etc.

but the truth is tha people usually sell the options shortly before expiration to “clearing houses” for a tiny bonus to them. lets say you own 100 put options on a stock and you are in the money by 10 usd, then there are clearing houses who purchase those options from you for lets say 9.80-. you have 0,20 less but you have the bonus that you do not have to bug around in actually delivering the shares to your counterpart. they take that job from you and have those 0,20 as bonus fir it.

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8

Thanks for your reply. The more research I do into options, the more I realise that options of any kind including vanilla or binary options are really complex investment vehicles. I am going to stay with and continue learning about trading just spot forex.

9

This is the exact explanation I was looking for. Thank you very much. No way I am going to trade options, it is way too complicated for me.

10

Optoins and binary options are different things. They have absolutely nothing in common. Focus your research on options.

11

Heres the commonly used formular to calculate the true value of a option

Screenshot_20190729-030145_Chrome
Screenshot_20190729-030145_Chrome1080×1673 243 KB

Edit: i only now saw that you specifically asked about binary options. Dont touch binary options in no way. They are fraud in 7 out of 10 cases.

12

It is a casino. So if you want to make money on a constant basis try to be in trading, not options

13

Same opinion from me! Options trading is meaningless; it’s all about gambling & almost all of the Options brokers are the real scammers!

14

Like some other person already suggest you better stay away from those and there is no need to understand their nature, concentrate on forex trading, commodities and maybe if you want also cryptos. Oh, I forgot about the stocks as well.

15

Just to be clear here:

@eddieb was talking about BINARY Options (quite correctly to stay AWAY from). NEVER confuse those with PROPER Options. PROPER Options (for want of a better description) are perfectly valid trading instruments if you understand them. It’s a HUGE market But NOT BINARY Options. There is only one REGULATED Binary Options Broker on the planet and that’s NADEX. But even then: the math of making money with Binary Options just doesn’t stack up (there’s info. ALL over the Internet about this).

1 Like
16

I had hope for you until you threw in FOREX and Crypto!!! LOL!!!

1 Like
17

Yes I know that! And this is why I added; “Almost” not all the Options broker! Thank you.

18

Well good for you. So pleased you understand the difference. Post was actually not particularly directed at you Mr. Attitude i.e. I merely replied to your post is all for the benefit of others.

19

Huge difference there Binary Options and Options Trading. Binary Options is bad, Options Trading, if you know what you’re doing, can be good. I think I’ve seen some members here discuss it.

20

Okay; but you replied to me! That’s why I thought it’s only about me! By the way, have a great day!