Meta: Traditional options and binary options are both ways of trading the price of financial assets. Learn more about the differences and similarities.
When binary options were first introduced as a way of trading financial assets online, most investors confused it with traditional options trading. While the two markets both allow investors to speculate on the prices of various financial assets, there are fundamental differences between them that traders need to understand before deciding which market to trade. Generally, traditional options are more complicated and sophisticated whereas binary options have completely demystified and simplified the process of online financial assets trading.
Mode of Trading
Traditional options are contracts that give buyers the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. For instance, if the price of a particular stock is $10 and a trader wants to buy 1,000 shares, he would need $10,000 for this purchase. However, using traditional options, the contract might be worth $10 and a trader would have the right to buy the 1,000 shares at the current price but at a future date. If after six months, the price is $13, a trader can exercise his right and make the $2,000 profit ($3,000-$1,000). If the price goes down, the loss would be $1,000.
Binary options, on the other hand, allow traders to decide whether the price will close higher or lower than the strike price. For instance, if a trader is trading the price of gold and places a Call order at $1140, he will earn money when the price of gold closes even marginally higher than $1,140. Here the focus is on the direction of the price movement and not the magnitude of this movement.
Payout and Losses
Binary options are known for their fixed risk and reward nature. That is, the risk and reward, when trading binary options, is defined. The maximum risk a binary options trader can incur is the value of the contract traded. The maximum profit is also defined and traders can receive returns of between 80-500% on platforms such as Option.FM.
In traditional options, however, the risk or reward is dependent on how far the asset price moves away from the strike price. The loss or profit that a trader will generate depends on the pips difference between the strike time and expiry time. The higher the pips difference, the higher the profit or loss.
Type of Contracts
There are mainly two types of orders in the traditional options market. Traders can only either buy or sell Call or Put orders in the traditional options market.
In contrast, the binary options market allows traders to trade the price movement of financial assets in a variety of ways. Aside from the standard Call/Put orders, traders can also trade contracts such as ladder options, Pairs, One Touch, weekend trading options, Touch and No Touch options and boundary options. This diversity of contract types allows traders to get the most out of their trading activity and to diversify their trading portfolios.
Expiry Time
The expiry time is the preset time at which the outcome of the trade will be determined. Traditional options usually have longer expiry times than binary options. A typical traditional options contract will have an expiry time of 1 month, 1 quarter or 1 year.
In binary options, however, traders can trade contracts that have shorter expiry times such as 1 hour, 4 hours or 1 day. On platforms such as Option.FM, traders can also trade contracts that have expiry times as short as 30 seconds. The shorter expiry times of binary options allow investors to make quick profits in the market.
Trading Capital
The traditional options market has long been considered a market for the sophisticated and elite. The main reason for this is the huge capital requirement. To trade options on the Chicago Board Options Exchange (CBOE), traders need to meet the minimum capital requirement of $25,000. This effectively locks out a number of traders who would have wished to participate in the market.
Conversely, investors can start trading financial assets online with very minimal capital and still make decent returns on their investments. For instance, the minimum deposit on Option.FM is $250 and trades can make up to 91% returns on standard Call/Put contracts.
Trading Times
Most traditional options trading occurs on the Chicago Board Options Exchange (CBOE) which operates when the New York market is open. Usually, traders can only place trades in the traditional options market between 0930hrs-1600hrs ET.
On the contrary, the binary options market is open 24 hours a day. Binary options traders trade financial assets from all over the world and at any given time; a particular major trading market is open and traders can always find an asset to trade. Additionally, on platforms such as Option.FM, traders can place weekend trades on their favorite assets.
Regulation
The traditional options market is highly regulated. Additionally, traditional options are traded in an exchange; where traders trade against each other. Trading via an exchange gives traders the peace of mind that the broker will have no vested interests against them.
Binary options still remain largely unregulated. Most binary options platforms are still unregulated and there have been complaints from several traders regarding scam related activities of some brokers. In binary options, traders should always exercise due diligence when selecting a broker to trade with and it is usually advised that they only trade with reputable and professional platforms such as Option.FM.
Final Word
Compared to traditional options, the binary options market offers traders an exciting way to trade financial assets online by allowing them to start trading with low capital while still standing the opportunity to make huge returns.
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