I know the basics about options, I wouldn't dare invest in them at this point. But recently I was reading about something online called binary options or digital options. What are these and how are they different from traditional options?
You can read more here:http://en.wikipedia.org/wiki/Binary_optionThe big difference is binary options have a fixed payout. Traditional options don't. The payout goes up the more you are 'right', i.e. if you buy a call because you think a stock will go up, the more it goes up (and the faster) the bigger your profits. However, it would follow that binary options are probably cheaper to offset the open-ended possibilities.
Another site has this:"A type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money.These types of options are different from plain vanilla options Also sometimes referred to as "all-or-nothing options" or "digital options". http://www.investopedia.com/terms/b/binary-option.asp
Thank you for the info.Do you think then that binary options are a better place to start if I'm thinking of investing in options for the first time? I mean are binary and traditional options fundamentally the same? I saw that some of the binary options trading websites offer "practice accounts", is this also true with some of the traditional options trading websites?Any input is much appreciated.
I guess it may seem that binary options are simpler. But the main problem is if what you are betting on isn't a binary (on/off) type of bet, then you lose it all if you are just slightly wrong, and you don't benefit additionally if you are really right. So a real binary bet, like, will Obama or Romney win the election, there's only two possible results (barring freak extremes) so where Obama wins by one electoral vote or a landslide, doesn't matter to the bet.But betting on what the value of Google will be, is on a sliding scale. A binary option might say, will it be above or below $735 on January 18, 2013 (it's now $734). But Google's value will slide around that mark with many possible results; it might be $735.01, or $800, or $600.Someone today bet it will be above $735 by buying the traditional option call GOOG130119C00730000 and paying $38.20 for the bet. Now if they're wrong, they lose it all, but if they are right, then it matters how much. If Google goes to $800, they get $70. If Google goes to $900, they get $170. If Google goes to $1000, they get $270, etc. That's traditional options.With binary, you might bet to receive $100 if Google will be above $730, and the privilege might cost you, I estimate, $58. (I don't know if this price actually is available, but keep reading.) If Google is $731, $800, $900, $1000, whatever, you get a flat $100.Simpler, but limited. You could accomplish nearly the same thing by buying traditional calls right below it and then selling calls at the price mark (This called a spread... I think?) buy 730.00 GOOG130119C00730000 41.10sell 735.00 GOOG130119C00735000 38.20So to bet Google will be above $735 you'd buy for $41.10 and sell at $38.20, a difference of $2.90. If you are wrong and Google is much below $735, you'd likely lose everything. (Actually it slides between $5 and $0 at prices between $735 and $730: being slightly wrong might not hurt.) If you are right you would get the $5, and only $5. If Google shoots through the roof, you don't benefit by being really right. Paying $2.90 for a chance to win $5 would be about the same as paying $58 to win $100, that's where I'd guess the binary option market price to be.Hope this is useful! Any criticism of my example is welcome.
buy 730.00 GOOG130119C00730000 41.10sell 735.00 GOOG130119C00735000 38.20
Thank you for the explanation and detailed examples. The bottom line is binary or traditional, I need to learn more about options before I try investing in them.
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