How to gain synthetic leverage with bitshares binary options.
If the S&P 500 is trading at or near 1875, then the SPFIVE binary option should trade around 0.5 bts/SPFIVE as it would be considered ‘at the money’. Of course the actual price is dependent on liquidity and market participants. Suppose you take out a short position at 0.5 bts/SPFIVE and suppose the S&P 500 loses half its value to trade at 937.5 by October. At that point, SPFIVE market participants would likely determine that the chances are very low that the S&P 500 would get back to 1875 and they would subsequently price the option very low. Suppose you could then buy your SPFIVE back at 0.1 bts (or lower) to cover the short position you took at 0.5 bts/SPFIVE.
That gives you a gain of 80% using the binary option trade vs a 50% gain with a standard, non-leveraged short. Holding the option until expiration will give you a 100% gain. However, if the S&P 500 finishes above 1875 at the end of the year, then you lose 100% if you are still short any SPFIVE, but this risk profile is similar to any other kind of leveraged financial product.
The point is binary options are inherently more volatile than the underlying asset, giving traders synthetic leverage, especially as the contract gets closer to the expiration date.Greeks are often used to gauge the theoretical values of options as derived from performance of the underlying asset and time constraints. I don’t fully understand them and don’t use them personally as I don’t see the need but they are useful to many traders.