What are the Differences between Traditional and Binary Options?

by kelly on November 9, 2013

There are times when even the most experienced trader confuses traditional options with binary options or vice-versa. There are differences between these two despite being both traded on futures markets.

What are binary options?

A binary option’s payout is a fixed amount of a purchased asset or nothing. There are two types of binary options which are asset or nothing or cash or nothing option. The cash or nothing option pays a determined amount of cash, on the other hand the asset or nothing option pays out the value of the security bought. There are only two outcomes when it comes to the binary options market. In the binary options market, the return it provides traders is already determined before a purchase is done.

What are traditional options?

Traditional options are non-transferable and must be used on certain dates. To make a profit, the owner of the assets must buy them and sell the same assets on the trading market. Traditional options have leverage and margin qualifications that need to be met.

The Differences Between Traditional & Binary Options

Margin and Leverage Requirements

Traditional options have their own margin and leverage requirements that need to be followed. A highly leveraged market characterizes traditional options. Because of the margins offered by a broker, a trader has leverage wherein they can obtain positions that are larger than the trader’s capital. The margin is a type of loan facility offered by a broker to allow a trader to hold a higher position that his or her capital can offer. This trading option requires equity contribution from the trader so he or she can facilitate a trade. Binary options on the other hand have no such leverage. A trader in binary options is restricted by his or her own funds with no margin facilities from a broker.

Contract Requirements

Binary options are measured in terms of the money invested into the market and trade and not by assets bought. On the other hand, traditional options can buy one contract which is tantamount to 100 units of an asset used for the trade.

Costs of the Trade

Traditional options are more expensive than their binary options counterpart because traditional options have margin and leverage margin qualifications, and also have minimum contracts that need to be bought. On the other hand, binary options can start with a cost of only $25. The low cost of the market cannot be replicated in the traditional options market because of the strict margin and leverage qualifications.

Capital Qualifications

There is a huge difference between the capital requirements for traditional and binary options. In the binary options market, you can start with a capital of as low as $100 because there is no leverage or margins requirement. On the other hand, traditional options markets have minimum leverage qualifications of at least 1:50. A typical traditional options market needs $10,000 in capital to handle the conditions of a traditional options market.

Payouts

There are also distinct differences between the payouts of traditional and binary options markets. Payouts in the binary options markets are fixed and are determined before a trading position is opened. On the other hand, traditional options markets have varied payouts based on the movement of the asset purchased. The payouts vary and are unknown until the end of the trade.

One can see the differences between traditional options and binary options markets. These differences will help you decide on which market to enter and invest in. There are pros and cons in investing in traditional and binary options markets. The differences will provide future traders with the information they need to invest prudently. As a trader you can choose between the two and use them accordingly.

Informative sources :
CBOE