What is the difference between options and binary options? (Part 1 - Calls and Puts)

There are a lot of differences between binary options and options. In many ways, they really can not be compared. It is almost easier to write about how they are the same.

How are options and binary options the same?

• They both have a strike price
• They both have an expiration date/time
• They are both derivatives, and not the actual instruments themselves
• They both use a form of Calls and Puts

But even within those similarities, there are major differences. For example, Calls and Puts in regular options are still very different than Calls and Puts in binary options. One difference is that Calls and Puts in options increase and decrease in value over the course of the life of the trade. That is not the case with binary options (although, there are a few binary brokers that do allow for the concept of time-decay, also known as Theta. Time decay, or Theta, is a basic component of options pricing in normal options. By bringing that in to binary options, the trader can potentially exit a trade before the expiration without having lost the total amount they invested in that trade).

This post is not a course on options trading, and therefore it wouldn't make sense to explain each element in detail. There are volumes of books written on them. But, I will explain a few basic details of Calls and Puts.

What are calls and puts in options?

Like with anything, any explanation that done quickly runs the high-risk of oversimplification. That will also happen here. Every explanation requires more information, so that we do not have oversimplification. I apologize for oversimplification in advance. Fortunately to trade well in our binary option live trading room, you do not need to know any of the information found in this post. It is just interesting for many people, so I am writing about it.

As the price of a stock/currency/something else increases, the price of a stock increases (look, here already an example of an oversimplified answer!!) One of the primary elements that goes in to how an option is priced is the price of the underlying instrument that the option is tracking. So as the price of a stock goes up, the price of the Call option goes up as well. Therefore, if you buy a Call now and the underlying price goes up and you sell the Call, then you will make money (darn oversimplification!!!!).

Conversely, if the price of a Put increases in value as the price of the underlying decreases. In other words, if you buy a Put and the price of the stock goes down, then you can sell the Put with a profit.

How does that differ from binary options?

There are two differences here to mention. First, in most cases, as soon as you enter in to a Call or Put in binaries, you can not exit the trade until it expires (more on that in a different post). The second difference is that, in most cases, the value of the Call or Put does not change during the life of the trade. Therefore, you can not win any more than you agree to when you place the trade. Due to the fact that some brokers allow for Theta, it is possible to lose less than what you originally agreed to when placing the trade. You can do that with some brokers where they allow you to exit with a loss before the trade ends. It is a pretty cool idea, in my opinion.

I am going to be honest, this post is a little bit confusing and, again, way oversimplified. But to those who understand Options trading, then it isn't confusing. To those who do not know what Options trading is, then there is no need for you to understand this anyway. So it still works out.

And, again, none of it makes any difference to being profitable. If you want to trade binary options profitably, you do not need to know anything about options. You just need to know how to trade binaries. That's it. And we can help you in our Live Trading Room. So, come join us!