Options are useful financial instruments that can be extremely profitable when used correctly, and you can use them in many different trading strategies. However, there are two major types of them: classic and binary ones. While they are somewhat similar, each of these types has its own risks, and it’s quite important for every aspiring trader to learn the difference. In this Traders Union article, we explain how options work, what’s so special about binary options, and when you should use them.
How classic options work
Options are derivative financial instruments that allow you to speculate on the price movements of any underlying asset. Classic options give you the right to buy or sell that asset at a certain price level, but you can always decide not to exercise that right. That means you can use options to hedge against an unexpected price surge. There are two basic types of classic options: call and put. Call options give a trader the right to buy a certain asset, and put options give you the right to sell that asset.
These options are widely used by companies as a protection against certain types of risk, but they are frequently used for extra profits, too. Their profitability isn’t fixed, and they are certainly pretty risky, so novice traders shouldn’t use them without a clear understanding of their mechanism. But what about a special kind of the derivatives called binary options? Let’s compare options vs. binary options and see whether they are really that different.
How binary options work
Binary options are also derivative financial instruments that allow you to make profits by predicting the price movements of their underlying assets. Binary options are more rigid: if your prediction is correct, you get a full payout. However, if you are wrong, you lose all your money. These options are relatively easy to understand: all you need to guess is the trend direction. However, they are really risky, and no beginners should start their trading careers with binary trading.
Main differences
Binary options have fixed yields: you always know how much you’re going to get in the end. They are riskier than traditional options, and that’s why many countries and brokers prohibit binary trading. You can’t use binary options for hedging: they are suitable only for making profits on market shifts, so they can be considered pretty narrowly targeted.
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