The Advantages and Disadvantages of Digital Options Trading

Trading digital options can be exciting but it is important to understand the advantages and disadvantages of this form of trading. An important point to remember is that there is a big difference between a digital options trader and a gambler.

With binary or digital options trading, a trader is able to do his analysis before he goes into the market whereas a gambler simply makes his move based on a hunch or on luck. In digital options trading, there is no room for luck and a trader can acquire the necessary tools in order to succeed in trading. Let’s take a closer look at the advantages and disadvantages of this type of trading:

Advantages of Digital Options Trading

  • In digital options trading the risk and reward of the trade are known. That is, it does not matter how much the market moves and there are only two possible outcomes, namely, win a fixed amount or lose a fixed amount.
  • There are generally no fees, such as commissions, with the trading instruments.
  • Options are simple to use and you only need to decide is the asset is going to go up or down
  • There are no liquidity concerns because the trader never actually owns the underlying asset. Due to this, brokers are able to offer a wide variety of strike prices and expiration times and dates which is beneficial to a trader.
  • A trader can access multiple asset classes in global markets generally any time a market somewhere in the world is open.

Disadvantages of Digital Options Trading

  • In digital options trading, the reward is always less than the risk. In order for a trader to cover his/her losses, they need to be correct a high percentage of the time since losing trades will cost the trader more than they can make on winning trades.
  • Digital options trading markets are also often unregulated which may cause an issue in the case of a trade discrepancy.
  • In digital options trading no underlying asset is owned. This means that it is simply a wager on an underlying assets direction. This means that the money invested cannot be withdrawn nor the trade exited until the expiry time/date. It is important to note however, that starting in 2008, some options exchanges such as the Chicago Board Options Exchange (CBOE) began listing digital options. Since the CBOE is regulated by the Securities and Exchange Commission (SEC), this has increased the protection of investors and their investments.

Summary

As a trader, it is vital to be aware of both the advantages and the disadvantages of trading digital options. Based on this, traders need to pay close attention to their individual broker’s rules, especially regarding payouts and risks, how expiry prices are calculated and what happens if the option expires directly on the strike price. Traders should read through all the brokers’ information, their terms and conditions and be aware of all risks before making trades.