Pair options are a relatively new financial instrument which allow traders to speculate on the relative performance of two assets. A "pair."
Which will perform better over the next hour, day, week, month, or even longer: Apple, or the NASDAQ? That's pair options trading in a nutshell. As you can see pair options are really a quite simple product and are easily learned if you are familiar with stock trading at all.
- Market Neutral Instruments
- Profit From The Movement Of One Assets Against Another Regardless Of Overall Market Conditions
- A Form Of Binary Options
- As Binaries Returns Are Not Dependent On The Magnitude Of A Move
- One Tick Or 100 Points - Same High Payouts
Return rates for trades on these financial instruments are always shown and known prior to completing any trade. You always known exactly where you stand with your risk/reward profile. These instruments also offer very high potential returns ranging from 10%-600% (depending on contract type and pair divergence).
Pair options can be a simple way to directly speculate on the relative performance of two stocks, indices, or other assets. When trading these products a profit is secured when a trader correctly chooses the asset which performs better over a period chosen by the trader. And it is this attribute which makes pair options entirely "market neutral." Meaning, the overall direction or movement of the market makes no difference to a trader's profitability. Your investment is not subject to the manic swings of the market but only onrelative performance. In a down market this simply means the asset that loses less would be the relative performance winner. If a trader places a buy order for Apple vs. NASDAQ and shorty afterward the market turns down the trade is not affected at all. So long as Apple does better (loses less) than the NASDAQ they would receive the same high returns as they would in an up market.
The benefits of this structure are numerous and significant but have not yet been fully explored by the mainstream investment community. As their popularity continues to grow we expect this situation to continue improving as more people explore the various strategies possible using pair options.
Lets look at a quick example trade of a standard pairs contract shall we?
With precious metals being suck a popular topic these days we'll use Gold/Silver as our "pair" for this example trade.
Let us assume that our hypothetical trader is bullish on gold and believes silver will underperform gold over the next month due to weak industrial demand for silver in a soft economy, a factor not significant in overall gold demand. Our trader then places a call options order on Gold vs. Silver with a one month expiration date and offering fixed returns of 83% for a winning trade.
At the moment that trade is placed the performance of the two assets is "normalized." That is, set equal to each other. So it is only the performance of the two assets from that point forward - till expiration - that matters for profitability of the trade. Assuming our example trader was correct and gold gained say, 1.3% for the month while silver gained only 1.1% for the month they would be paid out the prior agreed upon 83%. The same would be true if gold had lost 2%, but silver had lost 3%.
That was an example of the basic "Fixed" pair options. The other main type of pair option contract is the "Floating" contract. With these contracts the performance of the assets is not normalized at the option purchase but instead is allowed to "float." Because of this with these contract type divergences can grow rather large which results in return rate structures can range from just a few percent for an asset which has vastly outperformed its paired asset, to upwards of 600% for an asset which has significantly underperformed its other pair asset. Clearly in the first case of small returns the contract is highly likely to finish "in-the-money" whereas in opposite is true in the case of the trade offering the extremely high returns. It will most likely expire worthless. But if it does finish ITM.....it pays off big.
This introduction is by no means intended as any kind of thorough education on the subject but rather a simple introduction which may serve to introduce this exciting new financial product to a new audience of investors who may not be aware of it. To find out more about these instruments and the broker who exclusively provides them you should start with this outstanding new stockpair review published for 2014
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