The world of binary options trading has grown tremendously over the past few years. Since 2008, countless option brokerages have sprung up online, offering a variety of trading platforms for option traders to use 24 hours a day, 7 days a week.
Binary options are some of the most used financial instruments in the world. They are known for their simplicity, accessibility, and high potential for profit margins with minimal investment. Anyone over the age of 17 can trade binary options, and all it takes is a little analysis in order to turn in a profit from a simple investment. One question many option traders have is this: Are digital options the same as binary options?
This article will answer that question and go on to explain how digital options work and how they are traded every day by option brokerages online.
What are Digital Options?
There are several types of financial instruments available for trading. Stocks are traded on open markets called stock exchanges. Currencies are also traded the same way. Futures are tradable instruments based not on current prices, but instead on expected future performance. Then there are options.
An option is not necessarily a trade in and of itself. It is, rather, a chance to purchase an asset at a later date. At least, that is the case with stocks and currencies and other instruments. In binary options trading, an option is a choice between two different outcomes: receiving money for a successful trade or nothing at all. This differs from stocks because you can sell a stock for less than you bought it for, and still receive some money from it.
Digital options, like those mentioned above, are the same as binary options. It’s just that option traders use different terms for the same thing.
How Digital Options Work
When you trade binary options or digital options, you are basically given two options:
- The asset does what you think it will do in a certain time period, and you receive a payout (called being ‘in-the-money’)
- The asset does not do what you think it will do in a certain time period, and you lose your investment (called being ‘out-of-the-money’)
When an option trader chooses to trade binary options with option brokerages, he or she is predicting what an asset will do. If the value is X, and the expiration time is, say, 1 hour, one option bet may be that X will close higher than Y when the expiration time comes around. If it does, the trader finishes in-the-money.
Of course, there are plenty of variations. One Touch options, for example, are when the asset only has to touch the desired price within the hour. So, if the price is X and the desired price is Y, the asset just has to reach Y at any point during the hour without closing at Y or above before the hour is up.
There are other types and styles, and shopping around for the best options for you is preferred. But, simply put, digital options provide a way to potentially make a lot of money with a minimal investment.