In this article, we’ll cover the basic Differences between Binary Options and Stock Options.
Binary options, as the name suggests, can have only two possible outcomes. Either a win or a loss, just like the binary digits- 1 and 0. They have fixed payouts that have been agreed upon and which are paid to the investor depending on his prediction of a possible price movement. On the other hand, the traditional stock options have varied payouts which depend on the size of movement of the price of the asset when compared with the strike price.
Another point of difference between binary options and traditional stock options is the Pay-out profile. In binary options, they pay out profile is more or less fixed and is decided before the investment is done. On the other hand, as said before, the traditional stock options pay-out depends on the size of the movement of the price of the asset when compared with the strike price.
The third point which could be used to differentiate between binary options and the traditional stock options is the Trading Pattern. In Binary options, the trade can be done on the basis of the figures for inflation, especially in the United States of America. On the other hand, this kind of practice is not that prevalent when it comes to the traditional stock options.
The fourth point of difference between the two is the ability to make out of money purchases. The out of money purchase in binary options is the same as seeking a traditional option for a cheaper rate. In this case, it is assumed that the strike price will be the same at the time of expiry of the respective options. The binary options pay-out will be fixed while those of the traditional option can vary to great extents.
Basically, binary options and the traditional trade options are the movements of the underlying financial instrument. Binary options movements between being out of the money or being in the money are mainly high placed as compared to the traditional stock options which would move at a much slower pace when the same steps are taken for both the options. Binary options are the “all or nothing” type of investment. Either you are right, in which case you get all your investment and the return or you are wrong, in which case you lose everything including all your initial investment. Even though the payouts of the binary options are fixed and can sometimes be much lesser than those of the traditional stock options, the amount that you lose is also fixed. So in case of a loss, you do not end up losing quite as much as you would have had you taken the same steps and invested in the traditional stock options. Also, binary options offer a much quicker return on investment than the traditional stock options. This has made them more popular of late.
These were the basic Differences between Binary Options and Stock Options, there are more which we will cover in an in-depth article coming next month. If you have any queries or comments, please write them down below.