We are all familiar with the basics of trading – a trader studies the market and buys an asset at certain price, hoping that its price will rise and he will sell the asset at the new higher price and profit from the difference.
In binary options trading though this is different. Yes, the trader, otherwise known as the buyer, will look into the market and yes he will decipher which way he thinks the market will move, but the outcome and method of profiting is somewhat different.
Here the differences are clearly explained:
Traditional trading: there are a multitude of possible outcomes, none of which are known when buying the asset
Binary option trading: there are only 3 possible outcomes – or the asset expires in-the-money, out-of-the-money or at-the-money. All three outcomes are fully known when purchasing the option and therefore all potential risks can be taken into account.
Traditional trading: the profit or loss is dependent on the magnitude of the price rise/fall of the asset e.g. if 200 shares are brought at $10 each, the amount of profit or loss is totally dependent on how much the price of the asset rises or falls
Binary option trading: it is only the direction of the move that is important and not the magnitude of it. So, if a buyer places a $2,000 Call option on an underlying asset with a 71% return rate, he knows from the onset that if the option expires in-the-money then he will receive $3,420 and if it expires out-of-the-money then he will receive a 15% payback of $300.
This is because all of the outcomes of a binary option trade are known from the onset of the contract. This reduces the risk factor and also limits the knowledge that a buy must have before he purchases an option.