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Is there a difference between binary option trading and option trading?

I thank you for your reply.

Hi Kenneth,

There is a big difference between equity options and binary options.

Equity options are calls or puts based on an underlying market, a strike price, and an expiration. The call or put makes money or loses money based on the movement in the underlying market. As an option buyer your risk is limited to the amount paid and the reward is theoretically unlimited. With equity options you pay a premium for that option. This premium gets smaller and smaller as the option comes closer to the option's expiration (known as time decay). So you lose money if the market moves against you and also if the market doesn't move. If the market moves in your favorite the potential reward is not capped.

Binary options are different because they have fixed risk and fixed reward. They are often known as "all or nothing" options because at expiration they will either be worthless or have their full value. We suggest using Nadex for binary options and at Nadex a binary option always expires at $0 or $100.

Let's look at a binary options example...

Let's say that you believe the S&P will close above 1285 at the end of today's trading session. If you buy a 1285 binary option for $50 and the market closes at 1285.25 or higher, the option will be worth $100 and you will have a $50 profit at expiration. If the market closes at 1282 and you are wrong, the option will be worth $0 and you will have a $50 loss at expiration.

Just for comparison let's look at an equity option example...

Since equity options don't have daily expirations we would need to trade a monthly expiration or weekly (available for some stocks). If we bought a weekly call option with a strike at $1285 and the market goes against us our risk is limited to the amount we paid for the option. If the market closed at $1285.25 we would have a full winner with a binary option, but we would probably have a small loser with an equity option because of time decay. If the market took off and moved much higher our binary option would have a MAX profit of $50 but the equity option could have a much higher profit depending on the move.

Hope this helps give you a better understanding about the difference between binary options and equity options.

If you're interested in experimenting with a practice account here is a link:

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Mark Hodge


Questions related to technical analysis, strategies, risk, trading plans, trading psychology and money management. Experience in trading all markets and time-frames with expertise in futures (e-minis, currencies, commodities) and equity options. Unfortunately I am not allowed to offer any specific trading advice (i.e. should I go long the E-mini S&P today).


I have been involved in the industry since 1995 working for Morgan Stanley Dean Witter and American Express Financial Advisors before becoming a full time trader. As Head Education Coach with Rockwell Trading I have coached hundreds of students around the world to achieve their trading goals with simple strategies, a sound trading plan and proper money management for the leveraged markets.

Currently serving as Rockwell Trading's Head Education Coach and moderator for Rockwell's Student Trading Room where we follow opportunities in the minis, interest rates, currency and grain markets daily.

Technical Analysis of Stocks & Commodities, "Day Trading With Volatility", June 2010 SFO Magazine, "Home on the Range: Lasso Trades Without Time", August 2010 SFO Magazine, "Day Trading Indicators, Part 1", January 2011 SFO Magazine, "Day Trading Indicators, Part 2", February 2011 SFO Magazine, "Technical Strategy", April 2011 SFO Magazine, "Advanced Trading Techniques - Futures Spread Trading", October 2011 Active Trader, "A Simple Day-Trading Strategy", November 2011 Marketplace Books, How to Trade Commodities: Simple Strategies for Gold and Crude That Traders Can Use in Any Market, June 2011

Formerly licensed as a financial advisor with Series 6, 7, and 63 licenses. B.A. in Organizational Communications with a Business Minor from California State University, Sacramento.

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