Please explain differences between options trading and binary options trading
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  1. #1
    Join Date
    Feb 2012
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    1

    Question Please explain differences between options trading and binary options trading

    Hi Guys... having exhausted my search on the Internet i've come to this forum hoping someone could explain a few things for me.

    I know what binary options trading is (which has become very massive the last year). I'm confused when it comes to options trading (the likes of Optionsxpress, Tradeking and so on). I tried researching on their site but don't find much information.

    My question is

    What are the differences between binary options trading and options trading
    Would appreciate any help regarding this.

    EDIT: Investopedia info is decent but it still is a bit too much for a newbie like me.

  2. #2
    Join Date
    Dec 2006
    Location
    Wichita Falls, TX
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    2,911
    To put it most simply, binary options two possible pay-off (thus binary), either zero or the defined pay-out if the specified market move happens. Regular options have essentially unlimited numbers of pay-outs depending on what the market does, plus can be exercised.

  3. #3
    Join Date
    Feb 2012
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    4

    Default Why Trade Binary Options?

    In today’s financial markets, if someone wants to invest in an underlying asset, the investor has a few choices. The first and simplest choice is that of purchasing the underlying asset through one of the financial markets. This is the most capital intensive options as the investor must put up the money for the asset. There is a second way to invest in the underlying asset and that is to buy or sell options that trade in financial markets. This may be inconvenient and take time. There is another avenue that exists to allow the investor to invest in the movement of stocks. These are called Binary Options.

    A Binary Option is a method of profiting from the movement in stocks without having to finance the purchase of that stock. A Binary Option has two possible outcomes (thus binary). The investor will either make a predetermined percentage profit or will lose the investment completely. There are two basic forms of Binary Options. There are “call options“, for the investor who anticipates that the underlying asset will move up, and “put options“, for the investor who thinks the underlying asset price will move lower. Binary Options may be a risky investment tool, but they provide high reward. The clearest way to understand the value of a binary options trade is to compare it with a straight equity purchase and a conventional option trade.

    Variables:

    We are trading stock / options in Disney (“DIS”)
    At 2:00 PM DIS shares are trading at $39.00 a share.
    A $100 investment will be used for these examples.

    Stock Purchase:
    With $100.00 you could by approximately 2.5 shares of DIS. You would own the stock at a base price of $39.00 as the stock rises you make money as it goes down you lose money. The straight stock purchase has the least risk. The stock would have to go to $0 to lose your entire investment. You could also sell the stock at any point to minimize your loss. Of course to make 70% on your investment DIS would have to trade at $67.00. This could take a long period of time or may never happen at all.

    Conventional Option Trade:
    A short term call option with expiration date in 3 weeks and strike price of $39.00 costs about $1.00 per contract of 100 shares, so for $100 you could by 1 contract and control 100 shares for 3 weeks. In the conventional option trade the stock would have to go up more than $1 in the 3 week period in order to generate profit. If the stock closes below $39 at the expiration date than you lose your $100.00 investment. In order to make the same 70% return the stock would have to trade at $40.70 at some point before the expiration date. Two factors mitigate the risk. The option itself is trade-able before the expiration date and you can exercise the option at any time before expiration.

    Binary Option Trade:

    The investor purchases a Binary Option Call at a spot price of $39.00. The option expires at 2:30 PM. If DIS is trading above $39.00 at 2:30 you make $70 on the trade in minutes! If DIS is below $39.00 at 2:30 you lose your $100 investment.

    Conclusion:

    The Binary Option trade carries the highest short term reward. A return of 70% on your investment in a half hour. The trade off for this high reward is the risk of losing your $100 investment in the same period if the stock does not go above $39.00.
    Last edited by Pipzilla; 02-19-2012 at 03:15 PM. Reason: Advertising

  4. #4
    Join Date
    Jan 2012
    Posts
    13
    I tried trading binary options before but I may try traditional options and see if that works for me. Thanks for clarifying that!

  5. #5
    Join Date
    Mar 2013
    Posts
    42
    Quote Originally Posted by fxladyrae225 View Post
    I tried trading binary options before but I may try traditional options and see if that works for me. Thanks for clarifying that!
    Why don't you focus on real trading rather than binary option. I think forex is more straightforward. In binary option, you have to depend on your luck most of the time, (if there is anything like luck)

  6. #6
    Join Date
    Nov 2012
    Posts
    19
    This short video describes the differences between Option Trading and Binary Options Trading. Hope you and others find it helpful ^^.

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