Binary options are also very famously known as digital options. They have two possible outcomes i.e. "call option" and "put option". The return or payout is fixed before entering in to the contract.
Vanilla options are normal form of trading with expiration time and strike price. They are completely different from binary options. Main points of their difference are as follow:
Trading Pattern: - Binary options are very easily traded over the various exchanges all across the globe. The reason being that the prices of such options are easily available. They derive their value from producer price or consumer price index. Whereas vanilla options price is not that easily available thus making little difficult for the trader to trade them.
Change of position: - Traders can alter their position from out of the money to in the money due to changes in the price of underlying asset. In case of vanilla options a trader has a very limited chance of altering his position.
Rate of return: - the payout in case of binary options is determined at time of entering into the contract. In other words the trader is relieved from the burden of loss to an extent. Whereas in case of vanilla options the payout is not fixed at or before getting into the contract. In some cases trader simply gets the difference between the current price and strike price.
Beside these points of difference, the payment criteria of both the options are quite similar. They pay nothing in case the options binary expires out of the money.