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Binary Options Trading Vs Regular Options

By Alexander
In Guest Blogging
Sep 5th, 2013

Since the liberalization of trade and commerce that commenced right after World War II, the world was exposed to a number of new variables. One of them was foreign exchange disparities and another one was free movement of capital from one country to another. Businesses used over the counter derivatives and custom made options to hedge the risks of losses their financial transactions were exposed to. Later on, these same hedging tools became a mode of betting and exponential earnings.

These were the regular options, also known as the vanilla options. Businesses could buy a put option, which is a right to sell an asset at a given price, but not an obligation. The call option is the right to purchase an asset at a given price, but not an obligation. So now you know, that why an option is called an “option”. It is up to the purchaser of the option to exercise the right or not. Exchange traded options are exercisable for up to three months.

A binary option is a mutation or evolution of regular options. All the aspects are similar to regular option except duration and payout. The trader purchases a call or put option according to his notion of where the price will go. This purchase is defined for a set period of very short time, usually less than half hour. During this period, the trader does not have the choice to abandon his trade. If the price moves in a way leaving the trade profitable, the trader earns a certain ratio of gain and not all of it. Whereas if the price moves in a way that a loss results, the trader only loses his investment.

In regular options, the trader can abandon his position whenever he sees a loss is coming. Sometimes the oscillators/ signals are very strong, and trader does not necessarily lose his entire investment or an amount more than that because he closes his position quickly. Unlike regular options, the binary option strips the trader of the right to sell off his trade and close the position. The trader’s position remains open for whatever amount of time he chose the option to remain open, whether 1 minute or 5 or 3 hours.

The binary option however provides a built in risk management tool. In any given trade, the trader knows his maximum loss, which is his investment. No matter how badly the trade went, his loss is fixed. In the regular options, the trader does not have that advantage; his loss can be $10 or $10 million.

Alternatively, the binary option only allows a fixed payout ratio. No matter how good the trade ended, trader is paid only an agreed ratio; it can be 55%, 60% or 75% of profit. In regular option trading, the possibility of making enormous profit always exists. The trader is paid the full amount of gain that he makes.

One thing that can be affirmed here is that, the greater a risk one takes, there is a greater chance of making higher profits/ gains.

Author Byline:

To know more about options trading, you can visit intellitraders binary options trading platform.

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