Skip to main content

Binary v Vanilla: What’s Your Option?

If you’re even remotely interested in trading shares, then you are probably already familiar with the terms ‘binary options’ and ‘vanilla options’. To put it very simply, binary options, also commonly referred to as digital options, offer two results to each transactions, while vanilla options only offer a single result. In the following, we take a closer look at these two different types of options, in order to help potential upcoming traders make up their minds as to which of the two is best suited for their trading style.

All you need to know about binary options

Perhaps the simplest way to define binary options is by their alternative name of ‘all or nothing’ options. One must also bear in mind that several types of binary options exist. The most commonly traded type is the ‘above or below’ option. In the case of these options, the owner receives the whole option value if the binary option expires with an option value either above or below its own strike price. Say you buy a binary option with a $150 payout and an underlying asset price of $70. You stand to receive the payout if that price goes above $70 at expiration. Should the option be priced at $71 at expiration, you receive the $100 in full, without subtracting $71 out of $70, as is the case with vanilla options.

When purchasing binary options, which are typically European-style options, you know right from the get-go what you’re getting yourself into. In other words, the pay-off, which comes at the end of the time-frame selected for trading is known to the buyer from the very beginning. Meanwhile, during said time-frame, the price of the options will move, either upward or downward. When trading such options, you need to think about

a) The asset you are trading - what will its price be, when the contract reaches expiry?

b) How will prices fluctuate? Are they likely to go up or down?

The advantage in trading binary options is that they come with a fixed rate (which is why they are also called FROs, or fixed rate options). This means that the percentage of the rate of return is established from the get-go. The trader is definitely going to earn something, or they will earn nothing at all.

Binary options don’t take the amplitude of price variations into account: the only factor that makes a difference is whether or not prices have moved up or down. In this sense, they are the safer choice, in the binary-vanilla comparison, since they allow for a simplified approach to risk management. That’s because binary options cannot be traded (i.e. executed) before they reach the expiry date. Of course, setting the duration of that contract comes into play, when deciding how to trade binary options. But if you play your card right, the gains can be massive: up to 85 per cent, according to our research.

Choosing binary options over vanilla is largely a matter of trading pattern. If you do decide in favor of trading binary options, you can look at the price pattern of the assets you would be trading in. Take a close look at the producer price, the consumer price and analyze their evolution, especially when trading such options in the United States. The advantage to trading in the United States is that price information for most assets is usually available – yet bear in mind that this is not always the case.

What are vanilla options?

Vanilla options pay out the difference between the price of the underlying asset and the options’ strike price. This means that, for stocks with a strike price of $50 and an expiry date within a month, options owners start seeing profits from the moment stock prices go over the strike price threshold, to which one also needs to add the premium price that was paid out when buying said vanilla options. When strike prices are lower than $50, the call for these options is underwater, or, in other words, the buyer is ‘out-of-the-money’. Reaching the mark of $50 plus premium is called the ‘break even’ point and going past that point is a ‘in-the-money’ situation. One alleged advantage of vanilla options is that they can be traded at any point (unlike binary options, which depend on the contract’s expiry date). For instance, if the buyer feels that the value of his option has increased enough, they can choose to sell for profit at any point.

Whether you opt for binary or vanilla largely depends on your selected model of trading. One model, for instance, takes into account the possibility of hedging a set of binary options whose expiry date is approaching. This would make for a complicated situation, as, under said model, it would be difficult to estimate the actual movement of the prices – and in this scenario, vanilla options are usually preferred. The main difference between binary and vanilla is that, while the former offer fixed returns, the latter are dynamic in terms of potential gain. Of course, losses also need to be considered under a different frame, as with binary you would know right from the start how much you stand to lose. With vanilla options, this becomes an uncertainty. That’s because vanilla options come with a strike price. In ‘in-the-money’ trading situations, vanilla options take the magnitude of price movement into account, in order to determine the pay-out. The trader will be receiving more than the strike price, but the actual amount depends on the difference between said strike price and the assets’ underlying price.

When trading in an ‘out-of-the-money’ situation, traders may choose to purchase binary options and then exit the out-of-the-money with vanilla options, because in such scenarios they offer the cheaper price. But such scenarios also require an increased degree of attention, as the strike price and contract expiration date must be the same on both types of options. As a matter of fact, when it comes to transitioning from out-of-the-money to in-the-money, things tend to move rather swiftly for binary options, but precisely in the reverse way for vanilla options. Another important aspect to bear in mind with respect to vanilla options is that they can be turned into stocks, if they expire in-the-money.


Popular posts from this blog

Low interest credit cards - how to make them work for you

Credit cards are borrowing instruments, unlike debit cards where you already have the money. Banks are there to make money too. Just like high street stores, they hope to maximise their profits within the rules. So it’s important to understand the basics and find a credit card that’s right for you – you can compare low APR credit cards here . Now you know the rules, let’s find out how to play the game. The financial services industry charges interest on the money that it lends out. Let us assume you borrow £100 on your credit card and keep it for exactly one year before you pay it back. For the purposes of this article, we will assume your loan attracts 8% interest per year, which is the Annual Percentage Rate, or APR for that particular transaction. Practical example

Why it’s important to save for retirement

While retirement may seem far off in the distance for some, financial experts say you’re never too young to begin saving.  In fact, the earlier you calculate your retirement needs and start building your nest egg, the easier it will be to create a viable plan for the future. Many experts advise you begin saving a percentage of your income for retirement as soon as possible, no matter how little the contribution may be, as it’s possible the Social Security benefits millions of people currently depend on may be in jeopardy.

How does a Prepaid Credit Card work?

Can They Really Be a Solution to Avoiding Credit Card Debt? When it comes to plastic, there are a lot of choices out there. Not only do you have the choice of credit card , debit card, or prepaid credit card, but you also get to decide which financial company you want to use as your card provider. Credit cards and debit cards are both risky. Credit cards can help put you deeper into debt, while debit cards give thieves and collectors access to your entire bank account. A growing number of people are finding that prepaid credit cards are becoming the best option. What Are Prepaid Credit Cards? Prepaid credit cards look and act just like a credit or debit card, except you put the money on the card before you make any purchases. You are only allowed to spend as much money as you have pre-loaded on the card, which means that you are not at risk of going into credit card debt from overspending. These cards also keep your money safe, because thieves will be limited to the amount that is on t

What are the Consequences of Overspending in Life?

How overspending can ruin your financial life? With today’s expenses and their prices, it can be very hard not to overspend. Still, that isn’t an excuse to stray out of your budget. You know why? It is because overspending can only lead to more problems than you think. Overspending can affect your whole life. With all the possible consequences, it may jump from one problem to another. Unpaid bills All the excessive shopping with your credit card can cause steep bills at the end of the month. If you keep on using your credit but don’t have enough money to pay for it in the end, then you’re surely in for a huge financial disaster. This will turn out to be missed payments, and missed payments will ruin your credit report. Missing out on payments will get your credit report marked for 7 years or more. And you can’t get rid of them by finishing them off. Credit report Overspending can cause a chain reaction of events. Once you get your bills due to overspending, it’s possible for you to mi

How to Make Your Title Loans Safe and Sound

Although title loans are tagged as risky, innumerable folks still use them for fulfilling their different financial obligations. Therefore, such loans are not completely bad because their significant use despite the risk factor says a lot of their pros. This makes it vital to discuss how these loans should be used so that the risk factor can be minimized up to a great extent. For those who are not aware of, the risk of title loans crop up in the form of consequences when you fail to pay back the loan. With such a failure, you are surely going to lose your car as well as decrease your credit score further.

Money Moves: Imagine Playing Your Financial Life like a Chess Game

To say chess is a popular game would be a gross understatement. Chess, for at least 1500 years, has been considered to be not just a game, but a true test of intellect and character. One can learn a great many things about chess that can be applied to one’s life, not the least of which is one’s personal finance. Chess is a game that requires patience, foresight, and an ability to understand your opponent. Much like your personal finance, these qualities are required for you to come out on top in the end. Here are a few things you can take away from playing chess and use to improve your financial life:

The Financial Implications of Wills and Probate

Despite the stress and sadness that surrounds the passing of a person, death is synonymous with money. If the deceased has left behind anything of value, the family of that person is forced to deal with the access and distribution of such assets. This may entail the payment of inheritance tax, analysis of the will, and the application for probate. Probate is basically the process involved in establishing who can distribute the assets tied up in a will. In most cases, the deceased should have named an executor in their will – this is the person responsible for obtaining probate and dealing with any other financial implications of the death. The amount payable in inheritance tax is declared by the government or state, and the desired distribution of any monies and other assets should be clearly laid out in the will. However, the cost of obtaining probate is a further financial implication of death and one that can vary wildly should it not be carefully monitored. Whilst probate is