Difference Between Binary Options and Regular Options
Options is the kind of trading that lets you, as an investor, purchase a contract that offers you the right to purchase an asset like a Forex option or a commodity through a brokerage like Questrade. Regular options which are also known as Vanilla options have both differences and similarities when compared to Binary options, also called fixed return options or digital options. What is the difference between the two?
Just like most investments, the most vital aspect to contrast is the payout. With binary options the payout is known before hand at the beginning of the contract and can lie between 50 and 90% in case the contract expires in the money. When it comes to regular options the payout is not fixed and it depends on the size of the movement of the assets after passing the strike price.
In regular options an investor’s payment is per contract. Meaning that the investor will make a profit or loss dependent on the number of pips varying between strike price and expiry level. This is not like the FROs in which the outcomes are fixed from the beginning.
The difference between Binary and regular options with regards to expiry time is notable. Regular options have expiry times of quarterly and monthly while binary options have monthly, weekly, daily, and hourly expiry times.
The multiple expiry times on short term basis allow investors to make quick profits on their trades hence more flexible than regular options.
The sale of a regular option can be made at any point leading to expiry time. This is the opposite of a binary option where the return point is only exercised at expiry time. Hence with binary options a business man has to hold on to his options until the time expires. The investor must be keen when purchasing the options because he cannot sell after buying.
Risk vs Reward
In this difference, the two options vary widely. With binary options, an investor cannot lose more than what he has invested and he can even be refunded up to 15 percent of his invested amount, even when a prediction cleans out the money. The gain of such a risk which is limited is below what the regular options can provide. This gain can be between infinity and zero. But regular options can be leveraged which increases the risk and magnifies the gains.
The factor of risk vs reward is what sees many newbies trading in financial markets. These two options provide easy yes or no investment decisions. These options require no constant monitoring of markets.