Difference Between Traditional Options and Binary Options

Binary options are also known as all or nothing options. These options have many similarities and dissimilarities when compared with traditional options. Both of these options are derivatives which imply that the value of these options is derived from the worth of other assets.

The contracts associated with both types of options give a trader right to buy or sell underlying assets such has currencies, bonds, stocks or commodities at a particular price on or before an option expiry date. It is also important to note that the assets involved in such transactions are merely proxy assets and their value is used as a benchmark to decide whether the contract expires in-the-money or out-of-the-money state.

Binary Options

Pay Out Rate of the options:

In most binary options, the payout rate is fixed at the beginning of the contract. Generally, the payout rate for binary options is between 50 to 90% if the contract expires in-the-money. On the other hand, the payout rate in traditional option is variable and depends on the size of the investment. The investor makes a profit or loss depending on the strike price of the asset and magnitude of investment at the time of exercising of the option.

Expiry of options:

There is a notable difference in the expiry time of traditional and binary options. Binary options have hourly, daily, weekly or monthly expiry times depending on the way contract is arranged. This gives a trader a chance to enter in the trade just minutes before the expiry time of the options. Trader can often make profits very quickly when they invest in binary options. Traditional options, on the other hand, have monthly or quarterly expiry times. However, the trader is free to sell the options at any given time. The trader needs to monitor the swing of market constantly before the contract expiry time.

Execution of options:

In binary options, the trader needs to wait until the expiry time of option, i.e., the trader will have to hold onto the option until the expiry time. Therefore, a trader needs to take care when purchasing the options as he will not be able to sell the option until the expiration of the contract. This is unlike the execution of traditional option which gives the trader much more flexibility in selling of the option. A trader can execute the sale of traditional options at any point before the expiry time of the option.

Associated Risks:

Binary options are less risky than traditional options. This is because an investor cannot lose more than the amount they invested in the options. In fact, many binary options give a refund of up to10 to 15% even if the contract expires in out-of-money state. On the other hand, traditional options have higher associated risk. The trader can lose much more than the investment and this makes these options very risky, especially for those who do not have experience of trading in the financial market.

Binary options only involve a simple yes or no decision to invest in a particular asset. This decision can be made a number of times during one day. Therefore, a trader does not need to monitor the market on a regular basis. The rewards in traditional options can be much higher but the associated risk is also very high. Moreover, the trader needs to monitor the swing of market constantly while going for traditional options.