Trading in binary options has recently become one of the fastest growing and most popular ways for speculators to take market positions with limited risk. Nevertheless, traders have a choice between trading binaries with an online broker and taking binary positions using the limited number of listed binary options offered by the Chicago Board Options Exchange or CBOE.
Besides being similar derivative products, the two types of binary options offered have some fundamental differences which the trader should take into account when deciding which would be most appropriate to use. These differences have to do with initiation method, underlying asset availability, binary types, how much can be invested, and the payout structure if an option winds up in the money. The following sections cover these differences in greater detail.
Principal Differences Between Listed and Online Binary Options
The main difference between listed and online binaries is in how a trader initiates a position and how the option pays out if the trader correctly calls the market. Listed binaries offer fixed contracts which vary in price from $1 to $99 per contract, but which all offer a fixed $100 payout if the option winds up in the money at expiry.
The individual options are priced according to how close the underlying is to their strike price and how long they have left until expiration, hence the pricing is based on the resulting likelihood of the option ending up in the money. Options more likely to finish in the money typically carry a higher premium and cost more than options with strike prices far away from the current price of the asset.
In contrast, online binaries usually have the trader specify the amount of money they would like to invest and the strike price for each binary option, instead of the binaries being offered as individually priced contracts with a fixed payout. The binary options dealer would then offer a percentage return on the option depending on the strike price and its proximity to the current asset price. If the online binary option winds up in the money at expiration, the trader is then paid out a specific amount of return as long as they have correctly identified the market direction.
Nevertheless, a major advantage of online binaries is the much wider spectrum of underlying assets available, which typically includes: major currency pairs; precious metals and other popular commodities; large stocks and indexes. This contrasts with the CBOE’s much more limited offerings of only the S&P 500 Index and the CBOE Volatility Index or VIX to trade binaries on.
Payout Differences Between Online Binaries vs. Listed Binaries
Listed binary options generally have an “all or nothing” outcome that depends on the location of the underlying asset market at expiration. A trader will either be right on the market, in which case they receive a fixed reward, or they will be wrong and lose the entire amount of their investment.
With online binary options, many websites offer a 10 to 15 percent “insurance” or “guaranteed return” if the binary option expires worthless. Therefore, even if the trader does not ascertain the correct market direction, they will still get back a portion of their initial investment. While having a “guaranteed return” may offer the trader some incentive to use online binaries, that factor is priced into the option and not a free consolation prize.
Also, listed binary options offered by the CBOE are only at expiration binaries. This means that the binary option must be held until the expiration date or closed out for the trader to collect on the transaction if they are right. Many online binary dealers will offer at expiration binaries, as well as more exotic binary types like one touch and range binaries that have different and potentially more favorable payout circumstances.
Liquidation Differences Between Online Binaries vs. Listed Binaries
Furthermore, CBOE binaries are also quoted throughout the lifetime of the contract and may be liquidated at a market price at virtually any time before expiration. Online binaries, on the other hand, can generally only be closed out with the website that they were executed through, if at all.
Having the opportunity of liquidating the option before expiry can save a trader a considerable amount of money and frustration if they have erred in calling the market. Also, making a market in binaries through to their expiration allows for the option price to fluctuate as the value of the underlying asset changes.
This feature of CBOE listed binaries offers the trader the opportunity to either realize a profit early or get out of the option for a loss. Depending on the time until expiration and the proximity of the price of the underlying asset to the strike price, early liquidation offers the trader a considerable advantage to holding a binary option that can only be exercised and not closed out early.