The Difference Between Binary And Vanilla Options
The evolution in financial trading creates a constant variety of new advanced trading tools on the market . This also happened with the binary options, which have become a sort of continuation of the development of a simple, so-called vanilla option, which is well-known among investors since the late 90s. The traders of binary options, don’t always understand the conception and difference between the trading tools and can not much define their advantages. Therefore, today, we want to analyze the performance of different types of options and identify their advantages and disadvantages for the individual trader.
Let’s start with the classics – the vanilla options. This type of contract gives you a right to buy a certain asset at a fixed time interval in a certain value. A profit in this case will depend on the amount of change of the asset’s value. This type of option contracts became popular in large companies and investment banks, as a method of diversification of risks and tools for additional revenue. It is worth noting, that trading on vanilla option, the investor will need to attract a large amount of working capital as at the of contract purchase, the market value of the base asset is being calculated, and that makes the vanilla option unavailable to the average private investor.
In this regard, a binary option is more attractive. Today, the binary trading can be done by any person via online brokerage platforms. At the same time, just a minimum deposit is required to trade funds, for example, the Binomo broker makes trading on binary options possible with just $10 of the initial investment. So what is the difference between the vanilla and binary options ? Without a doubt, a binary option – it is a kind of derivative of vanilla exchange contract. However, there are significant differences and advantages. Firstly, in the system of profit. The vanilla option profit depends on the level of change in asset value, while in binary options, this relationship is not – simply making a bet on a forecast of market movements, the trader receives a fixed income. Moreover, the rate of return does not depend on the degree of fluctuation of the asset quotations, and, directly from the asset or more precisely, on the level of profitability of the option offered by the broker. This figure today ranges from 65 to 87%:
Also, a significant difference is the absence of direct asset purchases at binary trading. Here, as a condition of making a profit forecast goes in only direction of movement of the asset quotes, and no matter how much a certain time is or market fluctuations, the binary options contract could cost only 1 USD. These terms of trade are being offered by one of the leading brokers on the market – the Binomo company. This quite important policy makes it the most attractive for financial trading.
So, the binary options – is the rate on the change in value of an asset at a certain period of time, which, by the way, is being defined by trader.
The vanilla option (Wikipedia) is much more complicated – a market participant can not determine in advance the level of profitability of the contract, the amount of the alleged losses, and has a lot of indicators that complicate the process of trade. Because of a complex trading algorithm, the vanilla option has not found wide acceptance of private traders as a binary option.
A binary option has a simple principle of work: making a bet on a specific direction of the market, setting the duration of the contract, the trader receives a confirmation of the forecast earnings, while knowing in advance the expiry of the contract, the amount of profit and the level of potential losses. Formalizing the performance, the binary option allows you to accurately calculate the risk indicators and the right to manage their own commercial capital.
It is necessary to sum up, what are the main advantages of binary options:
- Ease of trading algorithm
- High Availability
- Minimum settings of trading conditions
- High efficiency and performance tools
Therefore, as a result of the evolution of vanilla option we got a high-performance tool that is completely adapted to work in the financial market, for the private trader.