Binary options are similar to the traditional options in a sense of the payouts that are based on a price of the instrument at the moment of the contract expiration. But in binary options importance is only in direction of the price change but not the value of this change. The main difference of binary options from traditional ones is a scale of potential profit or loss. Binary options are known also as options of fixed profitably (FRO), as a contract defines the income beforehand unlike the traditional options. A risk of traditional options is much more significant because the potential profit is undefined although you can limit the risk by using a stop loss order.
Comparison of binary and traditional options
Traditional options: Once a month
Binary Options: different time frames (day, hour and even 15 minutes)
Traditional options: Based on the price of the traded instrument.
Binary Options: Fixed.
Profitable option (In-The-Money):
Traditional options: A price comparison is required between the initial price and current market price in order to use the option.
Binary Options: The price movement is not important. All that matters is the direction (above or below the initial price).
Traditional options: Usually can be used at any time before expiration.
Binary options: Can not be used until the end of the time period.
The right to buy:
Traditional options: The Option Holder has the right to use options to purchase shares if the option is profitable.
Binary Options: The owner has no right to use the option to purchase shares.
The advantages of binary options
• Binary options are easy to understand and trade. It is very simple.
• The trader must only determine the direction of the price. The profit is predetermined and risk is limited.
• Payment of a binary option is fixed and predetermined, so that potential risks and benefits are known in advance. In the traditional options, there are no defined parameters, so that losses and gains are unknown.
• The binary option makes a profit no matter how much is the change in the right direction of the asset’s price. In contrast to the traditional options (vanilla options), binary options bringing high profits even at the slightest change in price.
• Simplified hedge of your funds. Binary options are frequently used as an effective tool to hedge existing positions. Binary options are compatible with most popular online trading techniques and strategies. They also provide a greater choice of short-term contracts in all markets, allowing traders to trade more often.
• Binary options are available 24 hours 7 days a week, allowing traders to trade basing of the multiple global assets. Traders can now trade binary options 24 / 7 on the same platform for trading binary options.