Brokers offering early exit facility

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Brokers allowing early exit

For long, experts considered the inability to get out of a trade at will to be the greatest drawbacks of binary options trading. However, the scenario has considerably changed over the past few years. More and more binary option brokers are offering early exit facilities, which many professionals perceive as a must have feature. While the early exit facility is a great boon to traders, it has increased the complexity of the binary contracts from a broker’s point of view. However, considering the fact that it would indirectly lure clients for the broker and contribute to the growth of binary options industry as a whole, several binary brokers have taken pains to create in-house strategies to mitigate risk.

Option Alpha

The first and foremost advantage of the early exit facility is that it enables a trader to cut down losses. Seasoned traders in the financial markets would vouch for the fact that a trader who is good at cutting down losses and riding on profits would eventually become a highly successful trader.

Most binary brokers who offer early exit facility use a combination of several factors to determine the amount reimbursed. These include the underlying price of the asset, time remaining to expiration, and whether the contract is ‘in the money’ or ‘out of money’. To manage the early exit feature in an efficient manner, binary brokers offering early exit facility lay down some constraints such as barring the feature in the first and last few minutes of the contract period.

The facility can be used by a trader when there is a firm trend reversal in the price of the asset. Nobody can predict the price of an asset perfectly all the time. The price of an asset can reverse at any time due to fundamental or technical reasons. In such circumstances, a binary trader who has taken a position can exit quickly and prevent erosion of capital. Of course, the trader will lose a portion of the investment, if the price is moving against him. Still, it is far better than losing the entire investment, which will demoralize a trader. On a large scale, if a trader is facing a streak of losses, which is quite common even for successful traders, then the savings from the early exit facility would add up to a considerable amount later on.

Even though, only a handful of binary brokers listed below are currently providing the facility, we can expect more to come forward in the future. As such, binary options trading business is currently evolving and new features of this kind can be expected to be introduced by established binary brokers in the larger interest of the industry as a whole.

Exit Strategy

What Is an Exit Strategy?

An exit strategy is a contingency plan that is executed by an investor, trader, venture capitalist, or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria for either has been met or exceeded.

An exit strategy may be executed to exit a non-performing investment or close an unprofitable business. In this case, the purpose of the exit strategy is to limit losses.

An exit strategy may also be executed when an investment or business venture has met its profit objective. For instance, an angel investor in a startup company may plan an exit strategy through an initial public offering (IPO).

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Other reasons for executing an exit strategy may include a significant change in market conditions due to a catastrophic event; legal reasons, such as estate planning, liability lawsuits or a divorce; or for the simple reason that a business owner/investor is retiring and wants to cash out.

Business exit strategies should not be confused with trading exit strategies used in securities markets.

Key Takeaways

  • An exit strategy, broadly, is a conscious plan to dispose of an investment in a business venture or financial asset.
  • Business exit strategies include IPOs, acquisitions, or buy-outs but may also include strategic default or bankruptcy to exit a failing company.
  • Trading exit strategies focus on stop-loss efforts to prevent downside losses and take-profit orders to cash out of winning trades.

Understanding Exit Strategies

An effective exit strategy should be planned for every positive and negative contingency regardless of the type of investment, trade, or business venture. This planning should be an integral part of determining the risk associated with the investment, trade, or business venture.

A business exit strategy is an entrepreneur’s strategic plan to sell their ownership in a company to investors or another company. An exit strategy gives a business owner a way to reduce or liquidate their stake in a business and, if the business is successful, make a substantial profit.

If the business is not successful, an exit strategy (or “exit plan”) enables the entrepreneur to limit losses. An exit strategy may also be used by an investor such as a venture capitalist to prepare for a cash-out of an investment.

For traders and investors, exit strategies and other money management techniques can greatly enhance their trading by eliminating emotion and reducing risk. Before entering a trade, an investor is advised to set a point at which they will sell for a loss and a point at which they will sell for a gain.

Money management is one of the most important (and least understood) aspects of trading. Many traders, for instance, enter a trade without an exit strategy and are often more likely to take premature profits or, worse, run losses. Traders should understand the exits that are available to them and create an exit strategy that will minimize losses and lock in profits.

Exit Strategies for a Business Venture

In the case of a startup business, successful entrepreneurs plan for a comprehensive exit strategy in case business operations do not meet predetermined milestones.

If cash flow draws down to a point where business operations are no longer sustainable and an external capital infusion is no longer feasible to maintain operations, a planned termination of operations and a liquidation of all assets are sometimes the best options to limit any further losses.

Most venture capitalists insist that a carefully planned exit strategy be included in a business plan before committing any capital. Business owners or investors may also choose to exit if a lucrative offer for the business is tendered by another party.

Ideally, an entrepreneur will develop an exit strategy in their initial business plan before launching the business. The choice of exit plan will influence business development decisions. Common types of exit strategies include initial public offerings (IPO), strategic acquisitions, and management buy-outs (MBO).

The exit strategy that an entrepreneur chooses depends on many factors such as how much control or involvement the entrepreneur wants to retain in the business, whether they want the company to continue to be operated in the same way, or if they are willing to see it change going forward. The entrepreneur will want to be paid a fair price for their ownership share.

A strategic acquisition, for example, will relieve the founder of their ownership responsibilities, but will also mean giving up control. IPOs are often considered the ultimate exit strategy since they are associated with prestige and high payoffs. Contrastingly, bankruptcy is seen as the least desirable way to exit a business.

A key aspect of an exit strategy is business valuation, and there are specialists that can help business owners (and buyers) examine a company’s financials to determine a fair value. There are also transition managers whose role is to assist sellers with their business exit strategies.

Exit Strategies for a Trade

When trading securities, whether for long-term investments or intraday trades, it is imperative that exit strategies for both the profit and loss sides of a trade be planned and diligently executed. All exit trades should be placed immediately after a position is taken. For a trade that meets its profit target, it could immediately be liquidated or a trailing stop could be employed in an attempt to extract more profit.

Under no circumstances should a winning trade be allowed to become a losing trade. For losing trades, an investor should predetermine an acceptable loss amount and adhere to a protective stop-loss.

In the context of trading, exit strategies are extremely important because they assist traders in overcoming emotion when trading. When a trade reaches its target price, many traders become greedy and hesitate to exit for the sake of gaining more profit, which ultimately turns winning trades into losing trades. When losing trades reach their stop-loss, fear creeps in, and traders hesitate to exit losing trades causing even greater losses.

There are two ways to exit a trade: by taking a loss or by making a gain. Traders use the terms take-profit and stop-loss orders to refer to the type of exit being made. Sometimes these terms are abbreviated as “T/P” and “S/L” by traders.

Stop-losses, or stops, are orders placed with a broker to sell equities automatically at a certain point or price. When this point is reached, the stop-loss will immediately be converted into a market order to sell. These can help minimize losses if the market moves quickly against an investor.

Take-profit orders are similar to stop-losses in that they are converted into market orders to sell when the limit point is reached to the upside. Take-profit points adhere to the same rules as stop-loss points in terms of execution on the NYSE, Nasdaq, and AMEX exchanges.

Credit Facility

What Is a Credit Facility?

A credit facility is a type of loan made in a business or corporate finance context. It allows the borrowing business to take out money over an extended period of time rather than reapplying for a loan each time it needs money. In effect, a credit facility lets a company take out an umbrella loan for generating capital over an extended period of time.

Various types of credit facilities include revolving loan facilities, committed facilities, letters of credit, and most retail credit accounts.

Credit Facility

How Credit Facilities Work

Credit facilities are utilized broadly across the financial market as a way to provide funding for different purposes Companies frequently implement a credit facility in conjunction with closing a round of equity financing or raising money by selling shares of its stock. A key consideration for any company is how it will incorporate debt in its capital structure while considering the parameters of its equity financing.

The company may take out a credit facility based on collateral that may be sold or substituted without altering the terms of the original contract. The facility may apply to different projects or departments in the business and be distributed at the company’s discretion. The time period for repaying the loan is flexible and like other loans, depends on the credit situation of the business and how well they have paid off debts in the past.

The summary of a facility includes a brief discussion of the facility’s origin, the purpose of the loan, and how funds are distributed. Specific precedents on which the facility rests are included as well. For example, statements of collateral for secured loans or particular borrower responsibilities may be discussed.

Key Takeaways

  • A credit facility is a type of loan made in a business or corporate finance context.
  • Types of credit facilities include revolving loan facilities, retail credit facilities (like credit cards), committed facilities, letters of credit, and most retail credit accounts.
  • Credit facilities’ terms and particulars, like those of credit cards or personal loans, are dependent on the financial condition of the borrowing business and its unique credit history.

Special Considerations for Credit Facilities

A credit facility agreement details the borrower’s responsibilities, loan warranties, lending amounts, interest rates, loan duration, default penalties, and repayment terms and conditions. The contract opens with the basic contact information for each of the parties involved, followed by a summary and definition of the credit facility itself.

Repayment Terms

The terms of interest payments, repayments, and loan maturity are detailed. They include the interest rates and date for repayment, if a term loan, or the minimum payment amount and recurring payment dates, if a revolving loan. The agreement details whether interest rates may change and specifies the date on which the loan matures, if applicable.

The credit facility agreement addresses the legalities that may arise under specific loan conditions, such as a company defaulting on a loan payment or requesting a cancellation. The section details penalties the borrower faces in the event of a default and steps the borrower takes to remedy the default. A choice of law clause itemizes particular laws or jurisdictions consulted in case of future contract disputes.

Types of Credit Facilities

Credit facilities come in a variety of forms. Some of the most common include:

A retail credit facility is a method of financing—essentially, a type of loan or line of credit—used by retailers and real estate companies. Credit cards are a form of retail credit facility.

A revolving loan facility is a type of loan issued by a financial institution that provides the borrower with the flexibility to draw down or withdraw, repay, and withdraw again. Essentially it’s a line of credit, with a variable (fluctuating) interest rate.

A committed facility is a source for short- or long-term financing agreements in which the creditor is committed to providing a loan to a company—provided the company meets specific requirements set forth by the lending institution. The funds are provided up to a maximum limit for a specified period of time and at an agreed interest rate. Term loans are a typical type of committed facility.

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