How Trading is Like Flipping a House (and Not)
The third most-watched cable network in 2016, behind Fox News and ESPN, wasn't CNN but Home and Garden TV. The comforting stories of taking an undervalued property and selling it for a profit contain useful ideas for traders as well.
By Vikram Rangala
Wednesday, December 28, 2016 - 00:00
Home & Garden Television, home to "Property Brothers" and a bunch of house-flipping shows like "Flip or Flop," has risen to become one of the top three cable networks in the US, helping fuel a 30% rise in the price of parent company Scripps Networks Interactive, Inc., which also owns the Food Network and Travel Channel. This comes at a time when cable is losing subscribers to online, on-demand services. HGTV itself has lost 4 million subscribers in the last two years.
Most of the networks shows have similar formulas, the ones that viewers expect and love. They don't change much except the hosts and titles. The story is some version of this: a nice couple (usually) finds a house that is a little broken-down, but has potential. Sometimes they're really broken down—it adds drama if they find termites, rats, or lead pipes. In the language of traders, those properties are "undervalued."
That's when the story gets interesting. Under the dingy linoleum they may find some great hardwood flooring that needs some loving refinishing. Finishing the space above a garage could expand the total square footage and be perfect for a teenager or mother-in-law. And who doesn't love a music montage of the hosts and the flippers taking sledge hammers to a living room wall to turn the downstairs into an open concept living space?
It's great escapism. You get to vicariously do home improvement projects even if you're not handy. You get to see the transformation happen in minutes instead of weeks. And you don't have to deal with the rats yourself. More than that, you get to see the process of that undervalued property getting value added to it. And most of the time, you get the happy ending when they sell it for a profit, with the numbers getting added up on the screen and the net profit showing right before they cut to commercial.
Trading is also about buying undervalued properties with the goal of selling them for more once the market realizes their true (higher) value. Or it can be about selling an overvalued property and then closing out the deal only after the market discounts the excess value and brings the price down. We call it short selling, but with Nadex binary options, it's even simpler than with stocks or futures, because your risk is guaranteed not to exceed a certain amount, even if you're completely wrong.
There's a difference between trading binary options and flipping houses that should be easy to spot. When you buy an undervalued binary option, you don't have to do any work to add value to the property. You just wait for the market to adjust its opinion about the value and push the price higher. It's not so much like flipping a house after a makeover as it is like buying a house in a neighborhood that is about to get fancier. Maybe Google is opening a new office there or Beyoncé is buying a home nearby.
Not only do you just have to wait for the price to move, with binary options, you don't have to wait very long. It can go from 20% of its maximum possible value to 80% in a matter of minutes or even seconds. If you like the instant gratification of seeing a ramshackle house turn into a luxury villa in 22 minutes, you'll probably like watching a binary option go from out-of-the-money to in-the-money with a move of just a few ticks.
Another difference is that while most of us can't afford the cost or the risk of flipping a house, we can afford to trade a binary option. Trading just one will typically cost less than your monthly cable bill, and never more than $100. You don't have to just watch it happen. You can make it happen in your own life, in an affordable way with limited risk.
Interestingly, research shows that part of the reason more people watched HGTV is that it was a welcome break from the sometimes stressful news in 2016. How does this apply to trading? While some traders like to speculate on the news and sometimes succeed—for example, buying crude oil binary options or spreads after OPEC agreed to cut output—many traders, particularly technical analysts, like trading because it gives them a break from the news.
You didn't have to have an opinion on the election or Brexit or anything else to trade the markets. If you saw a trend, you could blend with it. And if the market was flat, you could straddle it or construct a spread trade to take advantage of any movement or even the lack of movement. And you could do it all without CNBC in the background. Instead, you could have the fun and creativity of "Buying and Selling" or "Masters of Flip."
Part of HGTV's appeal is watching people take on a pretty big risk, one that not everyone is able or willing to take. The housing crisis of 2007 is still fresh enough in our minds that people haven't forgotten that the risk is real. You could end up with a house that loses your money and doesn't pay off the mortgage.
You can't go underwater with binary options. They represent not just a different trading product but a different view of risk. Nadex represents the belief that risk can be limited and still substantial enough to bring a sizeable reward. That trading doesn't have to involve unlimited or unaffordable risks or leave you in debt or lying awake at night stressed out.
Instead, you can just be willing to take on a limited risk, willing to accept that sometimes there will be losses, just like sometimes there will termites or lead in the pipes. But in the end, you'll learn to spot undervalued properties and take limited losses and timely profits in a consistent and effective way. And that can be just as fun as picking the right tile or finding hardwood flooring underneath that old linoleum.
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