What are the Differences between Binary Options & Traditional Options?

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The trading world can at times be quite complex. We see the terms binary options, vanilla options, forex trading and we wonder what the differences are. Aren’t they all just a way of buying something, waiting for the price to change and then selling? The simple answer is no. But it isn’t too far from the truth.

All trading is about price speculation and making money from underlying assets by making good judgments about what is going to happen. Binary options and traditional options vary in the way they are traded, the fees that are charged, the expiration times and the function that they serve. The best way to find out more about the differences is to take a look at each in a little detail.

 

Traditional Options

Traditional options involve traders paying fees to have access to an asset at a specific price at some time in the future. If, for example, they feel the price of gold per ounce is going to go up from 1690 to 1750 over the next month they may request an option at 1700. Then in one month they can either choose to ”exercise the option”, by buying at the locked in price, or not. The trade will also involve commissions. Traders dealing in options, from cattle to oil, dictate the prices of many things we rely on in life.

If the trader chooses to exercise the option then they will buy at the price and sell for a profit. A profitable trade will need a big enough price rise to cover fees and commissions.

Binary Options

Binary options involve no upfront fees. The trader stakes their capital in a price prediction with clear understanding of the profits attained if they are right. If they get it wrong they lose their stake, which is taken by the broker. If they get it right they make a profit, often of up to 80% or even more. Unlike traditional options there are normally predefined expiration times on the broker platform.

The Key Differences

The functions of the two types of trading are very different. Binary options are now predominantly geared towards the retail investor. They are accessible through trading accounts requiring as little as a $200 deposit. High-end traders and financial institutions usually trade traditional options. They are more complex than binary options and less accessible.

With binary options you are fully aware of your financial risk and the payout received should the trade be successful. Traditional option profits are related to the amount of price movement.

Contracts in binary options are fairly simple, as is the process of trading PUT, CALL, TOUCH/NO TOUCH and BOUNDARY trades. There is more complexity involved with traditional options.

Binary options are generally traded over shorted timeframes than traditional options.

Binary options are now targeted towards retail investors. Casual investors do not generally engage with traditional options, although increasing numbers of traditional option traders are now trading binary options as part of their portfolio.

Learn more about binary options at the world’s leading online binary options school.

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