What is the Difference Between Options and Binary Options?
There is a difference between binary options and options, and this article will help explain what that is.
Conventional options and traditional options are the same and they take place on trading platforms of options markets. They are all sent for settlement to the Chicago Board Options Exchange, otherwise called the OBOE. Plain vanilla options are the most common example of traditional options because they are the simplest trading options.
When speaking of binary options, one is also speaking of digital options or fixed return options which are considered “all or none” trading types where the trader hopes to profit from one out of the two possibilities for this trade type.
It is possible for traders to mistake these options for each other because they are both available for trading as financial instruments. In this article, we will be discussing the difference between binary options and options that are more traditional as we try to make corrections to any misconceptions anyone has to help distinguish how each is different from the other to eliminate the confusion encountered by some traders.
Traditional Options Versus Binary Options And Their Similarities
There are a number of ways that traditional options and binary options are similar. These two operate within the principle that the trades have a strike or settlement price along with a time and date expiration date which is established at the time of the trade entry. All options trades must have an expiration point at which time settlement is made.
Another similarity involves the underlying assets that are capable of being traded within each market. In other words, traditional traders can trade in stock indices, commodities, stocks and currencies just like binary options traders can. Similar asset types can be traded within each of these options markets.
Traditional Options Versus Binary Options And How They Differ
A primary difference between binary options and options that are traditional is the structure of the trade. The nature of binary options is that they are structured in an uncomplicated and simple way. Traders bet on one out of two possible outcomes when they trade with binary options. There is more complexity with traditional options because with these there are a number of ways to trade and profit from markets which don’t fit into the category of “all or none” as with the binary options market. It makes no difference the trade type used when making trades within the market, there will always be one or two options as the outcome resulting from the trade.
Both these trade options differ in another area, and that is in the way traders are allowed to end trades. With binary options, which are also called fixed return options, traders must reach the expiry time/date before they understand the outcome. On the other hand, traders can close trades before they reach the expiry time/date.
Another difference between binary options and options of the traditional variety is in trade obligations. With traditional options, there is no obligation on the part of traders to buy back the options once the trade has expired. However, with binary options these trades come with an obligation on the part of traders to exercise their options at the end of the trade expiration period.
There is a special price quotation employed with the traditional options market which shows both sides of quotes along with the month in which the options commenced. Binary options markets work without this complex pricing quotation system and traders use the market price of assets as a means of evaluating how their trades perform.
Traditional options markets use certain trade types as they hedge market trades. That makes it possible to utilize covered trading type outcome within traditional markets as a means of protection against incurring losses on assets in the traditional marketplace. It is not possible to use binary options for hedging purposes so they don’t fit this bill.
There is more risk to the traditional options market than there is with binary options. This is because there exist stiff margin and leverage requirement, greater commissions paid and losses in trades have steep implications on accounts since trade positions are not as large with the binary options market as they are with the traditional options market. Therefore, there is less risk with binary options and traders are not left to contend with issues such as margin, leverage or commissions. Additionally, features of binary options displaying payouts for trades before they are executed allow traders to evaluate what the profit/loss potential is before committing funds to the trades. This reduces the risky nature surrounding the binary options market.
Hopefully, we have cleared up some of the confusion existing in some trader’s minds surrounding the difference between binary options and options of a more traditional nature.