Binary Options vs. classic options

While classic options have been around for several decades, Binary Options are relatively new financial products. The first specialist brokers to offer to trade in Binary Options appeared on the market around 1999. As a result, Binary Options have now been around for around ten years, so they are no longer entirely new products.

In principle, there are many similarities between classic and Binary Options, but there are also some serious differences. In the following guide, we would like to inform you about the similarities and differences between classic options and Binary Options. In addition, we will give you an indication of which speculative investors prefer classic options and for whom Binary Options are often the better choice.

The main characteristics of classic and binary options are similar

In the main features, there are common features of classical and Binary Options. First of all, in both cases, the option in question relates to an underlying asset and, as with any other derivative, you need a broker to provide you with trading in these very instruments. In our comparison of Binary Options brokers, we have tested the best known and largest brokers for you.

Both classic and Binary Options have the following four underlying asset types in particular, which serve as a basis for speculation:

Consequently, both classic and Binary Options include numerous stocks, indices, but also foreign exchange and commodities, which represent the so-called underlying assets, also known as assets or underlyings. With classic and Binary Options, the investor does not, therefore, speculate on the option, but rather on the option itself, which is merely the means of speculating on price and price movements of the four types of underlying instrument mentioned above.

Another common feature between classic and Binary Options is that trading is possible with relatively little capital. Depending on the broker, speculative investors can, for example, trade in Binary Options for as little as five or ten euros. With classic options, small capital investments of less than 50 dollars are also often possible, although these options operate with a lever, which is a difference to Binary Options. However, we will go into this in more detail in the following section on the differences.

Another common feature of binary and classic options is that in both cases the total loss of the invested capital is possible. Furthermore, in both cases, the trader has the right to buy the underlying asset or to sell it at a certain price, but unlike futures, he does not enter into any obligations.

Various differences between classical and binary options

Apart from the similarities, there are some differences that can be used to separate Binary Options from classic options. First of all, we would like to give you an overview of some of these differences, but then we would also like to go into some of the different characteristics of classic and binary options.

In the first place, the following are the features that can differentiate classic and Binary Options:

  • Simplicity/flexibility of trading
  • with a lever or without lever
  • Terms
  • Number of underlying assets
  • maximum chance of winning / type of win

We would now like to go into the above-mentioned points in more detail.

Simplicity or complexity of trade

Quite a few experts assume that one reason for creating Binary Options is that they are easier to understand and act on compared to classical options. This is confirmed by a closer look at the construction of classical options and warrants. For each option, there are various ratios that are intended to help speculators decide whether or not it is a promising option. Among other things, these key figures serve to compare the numerous options with each other.

The key figures, which refer partly to options and partly to warrants, include

  • Theoretical leverage
  • Delta
  • Gamma
  • Fair value

These are just a few of the many indicators that make it extremely difficult for non-professional investors to assess the options. In the case of binary options, on the other hand, such ratios do not exist, especially since, unlike classic options, there is no time value either, which does, however, play a role in the value of the warrant. Investors do not have to take any leverage into account with binary options either, because this form of the option does not work with levers. We would like to take a closer look at leverage in the following section.

No leverage with binary options

Leverage exists in practically all options and also in warrants. It ensures that the value of the option changes many times over in comparison with the performance of the respective underlying asset.

Put simply, this means: If, for example, the price of the S&P500 index as the underlying for the classic option rises by two percent, the value of the option would immediately change by ten percent with theoretical leverage of 5:1. By contrast, there is no such disproportionate change in Binary Options. Instead, in the case of Binary Options, the value of the option does not change due to changes in the price of the underlying asset. In the case of simple Binary Options, the only thing that matters is that the price of the option at expiration is higher (for call options) or lower (for put options) than at the time the Binary Option was purchased.

When are profits made and what are the chances of winning?

Both classic options and Binary Options have terms, i.e. a time at which the respective option expires. Binary Options and classic options differ in terms of when profits can be made and what the chances of winning or winning are. In the case of classic options, the amount of the profit is not limited in principle. This is because the amount of profit or the value of the option is linked to the price development of the underlying asset. This is different from Binary Options because in this case, the respective broker specifies the maximum possible yield when buying the option.

Binary Options expiry time

This is usually between 80 and 92 percent in the case of simple options. In addition, there is often a so-called high-yield range for special types of trading, which also allows yields of up to 500 percent. Especially the larger brokers for Binary Options such as IQ Option or Deriv have these types of options in their program.

Speculators always make profits with classic options if they can sell the option at a higher price than they paid when they bought it. With Binary Options, on the other hand, a certain event must always occur for the profit to be booked. A typical event would be, for example, in the case of a Binary Option is a call option, that the price of the underlying asset is higher when the option expires than it was at the time of purchase. In this case, the speculator would then have made a profit, while the opposite event, i.e. that the price would be lower than at the time of purchase, would result in a total loss.

What are the terms of the respective options?

The differences in maturities between Binary and classic options are explained relatively quickly. The terms of classic options usually range between a few weeks.

With Binary Options, the average terms are significantly lower and – depending on the broker’s offer – often start at 30 seconds. However, they rarely extend over a longer period than until the end of the week. Binary Options are therefore particularly suitable for speculative investors who want to make profits extremely quickly.

For whom are which options suitable?

In summary, there are both similarities and significant differences between binary and classic options. Due to the key figures mentioned above and the significantly higher number of classic products in this category, these options are particularly interesting for speculative investors who are already familiar with the market or are professionals.

Instead, Binary Options are suitable above all for beginners or speculators who do not want to deal with the subject matter in a great way. This is mainly due to the simplicity of Binary Options because with the classic variants the investor only has to decide whether he believes that the underlying asset will trade higher or lower at expiration than at the time of purchase.

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