We are often asked the difference between traditional options trading and binary options trading. Today, is the day we go through some of these differences so that you can understand which would be best for you.
The Main Differences
BINARY OPTIONS DIFFER FROM TRADITIONAL OPTIONS IN FOUR MAIN WAYS: TIME TO EXPIRATION, TRADE EXECUTION, LEVERAGE, AND RISK VERSUS REWARD PROFILE.
Time to Expiration
Traditional options usually have expiration times ranging from weeks (weekly options) to years (LEAPS), with monthly options being the most common. Binary options operate on a much shorter time frame, with expirations ranging from 60 seconds to 24+ hours. These short-term time frames can make trading in binary options a lucrative endeavor. Numerous wins over the short-to intermediate term can really add up.
Traditional options can be bought or sold anytime before expiration when the market is open. Many traders of traditional options buy them and then later sell them for a profit (or a loss) prior to expiration. This is not the case with binary options. Once purchased, in most cases they must be held until expiration and cannot be re-sold. Upon expiration they will be either in-the-money or out-of-the-money. The options buyer will only then reap a profit or accept a loss.
Additionally, a trader can execute a trade on the weekend or after standard market closing times, if so desired and permitted by your broker. This can offer additional profit potential.
Some sample binary options brokers that permit longer trade times:
Binary options are unleveraged instruments. This means that 100% of the investment is purchased with the trader capital. In leveraged trading, borrowed capital is used by the trader in an attempt to magnify his potential profits. A high degree of leveraging is commonly used in FOREX currency trading and in commodity options trading. Although leveraged trading can provide for outsized profits, it also has the inherent risk of large losses.
The unleveraged nature of binary options trading provides a built-in level of risk reduction to the trader that is not found in leveraged transactions. Risk versus Reward: The risk-reward profile of binary options is much different than that of traditional options. The trader of binary options can never lose more than is invested, and in many cases may get a refund of up to 15% or more of the invested amount, even if the option expires out-of-the-money. The trader’s reward is limited to a fixed percentage of the investment, usually between 60-95%. This differs from some types of trades in the traditional options arena, where losses can be substantial and winnings can be, in some cases, far greater than 100% of the original investment.
There are benefits to both, but we prefer the speed and reliability of Binary options, over traditional options trading. It’s great that you can get in and out of the market quickly with specific expiry times.
If you want to learn more, visit our binary options 101 page on the best ways to start in this market.