Binary options trading differs in many respects from traditional option trading. The very mechanism of trading, the platform for trading and timelines are all different in both cases.
Binary options trading is executed across trading platforms involving two parties either selling or buying the options. However, traditional options are traded in the financial exchange that trades in the underlying assets. There are many binary options that are exchange traded, but majority of the trade happens on platforms between option seekers and sellers.
Binary options and traditional options are both derivatives of assets. Their values are based on assets that they represent. Traditional options are rights to sell or buy an underlying asset. But binary options are merely contracts that have assets in proxy only. Assets are not bought or sold in binary options trading. It is the trader who simply has to analyze the market and make speculations of asset movement. If the market performance is as per speculation, then the contract is said to have expired “in the money” else it is “out of the money”. Therefore, binary options include sales and purchases of indicative options and not the assets.
Binary options have been based on traditional options along with improvements. Traditional options can be held for variable time lengths. At the time of expiry a trader has to choose whether the option is exercised or allowed to expire. However in binary options the trader can either get a fixed compensation or lose his investment within a fixed time period. Often, this time length is much shorter than that of traditional options trading. Sometime binary options can be valid for as less as one hour like in Forex binary options.
Binary options trading has fixed payouts irrespective of asset value changes. However, traditional options change in returns as per asset fluctuations. You can exit a traditional option contract. You do not have to make contract exit choices in binary options trade. The outcomes are not variable and there are only two possibilities – either fixed returns or predetermined loss (equal in value to amount invested).
Binary options trading can be applied to any type of asset, making it more flexible and simple as compared to traditional option trade. Traditional option trade cannot fetch exponential returns like binary options trade can sometimes do. Application of betting strategies and strangle can yield great returns to the binary option investor. However, traditional options yield returns only based on asset value. The holding period or validity of traditional option contracts can be elongated and requires market changes to be drastic to yield large results. However, binary options have made the investor happier by announcing returns in advance of the purchase of options. The validity of options is much shorter and there is rapid movement of binary trades.
The world of financial investments has undergone metamorphosis since the advent of binary options trading. Conservative traders used to be skeptical of option investments earlier. The introduction of trading platforms, trading strategies and software have all catalyzed the growth of modernism in conservative trade. Trading is no longer for a fixed market and asset. It does not require people to choose only exchange traded instruments. People can invest from the confines of their homes and make sales or purchases with a click of a button. These changes have largely made binary options lucrative and attractive to traders.
