If you want to trade in options, there are several distinctions you need to be able to make. One of the most important things you need to know is the definition of an option. Then you need to learn what kinds of options you can trade and after you know all of that, you will be able to understand the difference between traditional and binary options.
What are Options?
Options represent contracts that give you the right (but not the obligation) to purchase or sell your stocks in a predetermined point in the future at a prearranged price. The point in the future we are referring to is call “expiration date”. The prearranged price is called a “strike price”. The way you can profit or lose from this type of trading is this – if you have a good sense of the market movement, you can use options contracts as a way of speculating on the market and either purchase stocks at prices lower than that of the market, or sell them at prices higher than that of the market. If you have good analytical skills, you can make a lot based on different trades and strategies. An important note is that whether you buy or sell an options contract, the fees (called premiums) are paid right away.
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What kinds of Options are there?
There are two types of traditional options – call and put. Call options give you the right to buy stocks at the strike price, while put options give you the right to sell. You can both buy and sell options. Note that there are two sides of the option – the buyer and the seller. If youre the owner of the option (meaning you bought the option) you have the right but not the obligation to take action. If the conditions arent good for you, you can choose not to do anything and let the contract expire, thus only losing what you paid for the contract.
However, if you wrote (or sold) the option, you gave the right to someone else, so if they decide to take action, you are obligated to comply. This is how you can lose from options trading and this is where the game of cat and mouse begins. The trader who has a better sense of the market will win.
For example, if you sell a put option, you are obligated to buy if the seller wants to sell (because he has the right and you have the obligation). You get the premium right away, but if the price of the asset goes down below the strike price before the expiration date and you have to buy, you essentially lose because you buy stocks at higher prices than the market is offering. Thats why you need to be extra careful when trading options – if you make the wrong predictions, you will lose. In the same time if you have a good enough sense of the market, you can profit significantly with a small risk.
Whats the difference between Traditional Options and Binary Options?
Binary options, just like traditional options, are prediction-based. If you make the right prediction, you win and if you make the wrong prediction – you lose. However, unlike traditional options trading, with binary options you never really purchase the asset. Also, you dont have the choice of whether or not to execute the trade.
Instead, you make a prediction and if that prediction is correct, you win a percentage-based payout (depending on the broker; in most cases its around 60% to 70%). You invest a certain amount of money and you make a prediction – will be the price of the asset be higher or lower at expiration? If you think its going to be higher, you take a call, and if you think it will be lower, you take a put. At expiration, if you turn out to be right, you win. Your profit is based on the sum youd invested plus the percentage the broker offers. If youre wrong, you lose your investment. Thats it. Thats how binary options work.
60 second binaries set the expiration at 60 seconds, meaning that the outcome of your prediction is known a minute after you make it. In principal, you can make a lot more trades with binary options than with traditional ones. Traditional options cost a lot more and actually involve taking action and owning assets.
Binary options (especially 60 second binaries) are fast, dont involve taking action or owning assets and allows you to trade a lot more. Those are the main differences between the 60 second binaries and the traditional ones.