The naming of the different kinds of binary options sometimes differs between the USA and the rest of the world. Originating in Europe, the term “spot options” (Single Payment Options Trading) is another name for “binary options”. In Spot Options trading, the trader sets a conditional scenario rather than a price at expiration date.
The trader defines a trading scenario that, according to his/her analysis, has the best prospects, including the risk-reward trade-off. The broker decides the probability that the conditions will be met and proposes an appropriate premium. The price of the option or the premium quoted by the broker will depend on the likelihood of the scenario occurring. The trader can agree to pay the premium and then buy the option or turn it down. Normally, the price of the option is a percentage of that pay-out. SPOT options are called the “binary option” by European brokers because there are two types of payouts, and these are:
• When the conditions set out by both parties occur, the investor collects the agreed-upon payout amount.
• If the conditions do not occur, the investor loses the full premium paid to the broker.
SPOT options are like basic “put” and “call” binary trading option. But with one caveat, the value of the trade is set by the conditional scenario, not just by the strike price and the expiry date. In the interests of clarity, when trading in spot options, the two possible scenarios are as follows:
• The trader is “in the money” when the conditional scenario occurs.
• Conversely, if stated conditions do not occur, the investor is “out of the money.”
It is also important to note that one of the biggest differences between SPOT options and standard binary options is that a spot option is a one-sided trade. You never need to close out the trade. On the other hand, one of the newest features of binary options trading is the ability to for traders to close out trades before their expiration times.
History of spot options trading
Until 1973, the options market was largely unregulated which meant that there was no reliability or stability when trading in options. Brokers were not held accountable for their actions. We all know that, with time, binary options trading was recognized as a valid means to trade on the global financial markets. SPOT options or single payment options trading, for example, was initially used in Europe as another way to trade in foreign exchange. Now they are being used across other markets as well.
Advantages of spot options
There are many advantages of trading in SPOT options. Here are a couple of the most important advantages;
• The biggest advantage of trading with spot options is that, because it is a one-sided trade, you never have to close out your position. For the uninitiated, closing out your position simply means that you are ending the trade.
• You are able to create different scenarios that allow you to choose exactly what you believe will happen in the market. Investors who trade in SPOT options always define the specifics of the trade before they commit to the trade.
• You are able to define the pay-out before you enter into the trade; consequently, you know the risk-reward trade-off before you commit to the trade.
Disadvantages of SPOT options
Unfortunately, as with everything, there are advantages and disadvantages. As it is important to arm yourself with knowledge before you make financial market trading decisions, here are a couple of the disadvantages of trading in spot options:
• Once you have bought a SPOT option, you cannot sell it to close out your position early; therefore, should market conditions change, you have no option but to wait it out.
• Your broker determines the following: the underlying asset that is traded on, the strike price, and the expiration date. You can choose whether to accept the trade or not.
Are you interested in the above but do not know where to find help trading in SPOT options? Well, I’ve taken a serious look at the different brokers that offer all forms of binary options trading, and I’ve come to the conclusion that the only broker to trade with is Stern Options. They offer a world-class online trading platform with one of the best education centres I’ve ever seen. What’s more, it is FREE to use. I’ve conducted a meticulous study of all of the materials available in Stern’s trading academy and found it immensely helpful in learning how to trade using the binary options trading vehicle.