Vanilla Options vs Binary Options: What You Should Know

In investing, an option gives you the right to buy or sell a security by a specific date. Options have different payouts, which means you can speculate on a security in different ways. Vanilla puts or calls are something most investors are familiar with. But binary options are something that often carry unique choices with how to speculate on a security. There are some big differences between binary and vanilla options. Here’s what you should know:

Overview of Options

If you look at the profile of a long call, it would show that before the $50 strike price, the buyer of that call was technically in debt. However, at $50 that profit begins to go up to at least a point of breaking even. When the security goes above $50 above what the option buyer paid, they are in the money. If the underlying security keeps going up, then the investor can sell the option at any point and get the profit. They don’t have to wait until the expiration date in order to do that. However, if the value keeps going down, they might have a difficult decision to make. They want to ensure they don’t bottom out too low but it could also turn around.

Are Vanilla Options the Right Choice?

With a vanilla option, you have a fairly straightforward scenario. It is something that gives you (the investor) the difference in price of the security after that option expires after subtracting the option’s strike price. The buyer and seller each agree to a price to buy and sell the security, which is what the strike price is. For instance, if you had stock A and it was optioned, you might pay $50 which would expire in a month’s time. The buyer of that option would hopefully profit, minus the $50 they paid to buy the option in the first place. Vanilla options are a powerful part of an investor’s arsenal and a smart way to grow wealth and you can find out more here.

Do Binary Options Make More Sense?

Vanilla options have certain payouts. But there are different kinds of options with varying payouts. A binary option is sort of an “all or nothing” approach to options. It will pay you, as the buyer, a payout if the price is either above or below the price at the time of buying once your option expires. There are many different types of binary options. However, a common type is the “above or below” kind of option.

The key way that this binary option differs from a vanilla option is that your payout is going to be determined by what the strike price is in comparison to your buy price at the expiration date. For instance, if you have a payout on binary option X that is $100, it might only pay that if your strike price is more than $50 when it expires. It would not calculate the difference as it does in vanilla options. In that case, as with a vanilla option, you would not receive the payout because it did not cover the strike price into a profit. Done right, it can help you leverage your investments.