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Binary Options vs Digital Options

Jul 20 2017
By
Jonathan Smith

The binary options industry continues moving forward. One of the rather new products which is available are the so called “digital options”. Though they may appear similar in nature to the classic binary options, there are several differences worth pointing out. 

 

The defining one is the addition of strike prices. 

 

A typical binary option allows you to trade, in relation to the current market price. For instance, if EUR/USD is trading at 1.1500, you can only purchase a call (or put), with a strike price of 1.1500. Thus means your option will be in the money, if the exchange rate is above (or below) 1.1500, at the time of expiration.

 

With digital options you can buy calls and puts at price levels different than the one the price is currently being traded at. These are called the strike prices. It goes without saying, but this provides greater flexibility to the trader.

 

Here is a side by side comparison of the two types of products, as provided by IQ Option:

As you can clearly see, with the digital option, we are looking at a strike price, which is fairly away from the current price. The binary option, on the other hand only allows trading at the current price. You may also note the vastly different payouts, which are quite normal, considering the strike price we were looking at. 

 

Strategic possibilities

On one hand you can place a much more precise prediction, which will increase your profit percentage (or payout). The maximum payout with digital options at IQ Option is 900%. The more exciting aspect is the fact you can create rather complex strategies with this approach.

 

For instance if price is trading in a narrow range, and you expect it to be broken, you can place a call above and a put below it. Although similar options are available, the key factor is that with digital options, you can determine the levels more accurately. If you think the top of the range should be further away from the price, than the bottom, you can easily set it up in such a way. 

 

 Example of a wide range. Although this range is fairly wide, the payout, if it is broken will cover the cost of both options

 

Alternatively, if you think the range will not be broken, you can place a put above its high point and a call below its bottom. Again, maximum flexibility is provided by the fact you can easily set-up wide ranges, tight ranges and even asimetric ones (the call and the put being set at a different distance from the current price). 

 

Of course the list of possibilities is not limited to these, as you have probably already thought of a few different strategies. 

TAGS: binary  digital  options  binary options  digital options  strike price   
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