Many of you will be familiar with vanilla options. They are the regular options offered by most online binary options trading platforms and they are even offered by some companies as a form of employee incentive. Binary options however are less well known about however their use is increasing in the trading market. What are the differences between these two types of options trading?
Vanilla options: they have two types of expiry times – monthly or quarterly
Binary options: they have more varied and immediate expiries of end of the hour, day, week or month
Vanilla options: the payout received will depend on the difference in the price change between the price of the asset at purchase and its current price
Binary options: the payout if fixed when the option is bought
Vanilla options: this type of option can be executed at any time up to time of expiry
Binary options: these options cannot be executed before their expiry time
Vanilla options: to be in the money their price must have risen by a certain amount
Binary options: they need only move a small amount in the right direction to be in the money
These differences necessitate a different approach when trading binary options. In some respects an investor is more flexible. He can choose from a wider variety of expiry times making options trading more flexible and personal and making the results more immediate. Any risk is also reduced since he knows from the onset what his potential reward or loss will be since the payout is known from the start. For example, if he purchases a $100 Gold binary option with a 70% payout, then at the expiry time he will either receive a $170 payout if his option expires in the money or nothing or a % refund if it expires out of the money (depending on the platform, this may be as much as 15%). What is important is that he will never have to pay more money than his original binary options price – in this case $100.
Since a binary option cannot be exercised before the expiry time, it means that his purchase is final as there is no get out option before the expiry time. However, to be in the money his binary option need only move by a small amount, in either direction (depending on if a Call or Put option was bought), meaning a positive result is easier to achieve. This also means that an investor can more easily invest a smaller amount of money and make a larger profit than vanilla option trading can generate.
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