In the world of financial products, digital options are a new addition while for several decades the market was solely ruled by classic options. It’s already been quite sometime when the specialized brokers first offered digital options trading – so, there isn’t a scope to call them a totally new product. Along with similarities, classic and digital options share some major differences. The following article is about those differences and similarities of new digital options vs classic options trading. We will give you hints about which investor prefer which as well.
Similarities in the Main Features of Classic Options and Digital Options
If we consider both the option’s main features, the similarities are easily noticeable. Firstly, both option is based on one underlying asset and like most cases to trade those instruments you’ll need a broker. The following four types of underlying assets serve as a basis for observation for both classic and digital options – while comparing them, we tested the largest and best-known brokers for you.
- Raw materials &
The classic and digital option consists of many equalities, indices, commodities and foreign exchanges that represent the underlying asset or also known as underlings. In both types of options, all the investor has to do is speculate on price and price development and the options are merely a mean provided to them.
Another common ground both that classic and digital option share is – minimum deposit. Meaning, you can start trading with even a fairly little capital, depending on the broker you choose – investment can start even at the amount as little as five to ten euros. However, a little from digital options, trading with classic options involves operating with leverage. While accepting a small inflow of money. Also in both options total loss of capital can happen. However, let us move on to the differences that classic and digital options show.
Differences Between Classic and New Digital Options
We have already shown you the commonalities of the two types and now it is time to shed some light on the contrast they present. The following features are the major dissimilarities of the classic and new digital options,
- Trading Simplicity: New digital option is popular among traders for being simpler to understand and easier to trade than the usual options available. This is a fact that is evident if you look closer to the construction and warrants of the classic options. To help the speculator, each option offers various measures to judge if it’s a promising option or not – these key figures help to compare with numerous options, some relate in part to options while some do to warrants. They include,
- Theoretic lever
They are also known as the metrics that make evaluating options hard even for professional investors. But in classic options, such key figures don’t exist. However, the digital option does not offer a fair value which also plays part in the value of a warrant. Since digital options do not work with leverage, so possible lever investors do not necessarily consider digital options.
- The Need of Leverage: Leverage, also known as the lever, ensures that the value of an asset changes compared to the performance of the underlying – it exists virtually on warrants and all options. More elaborately, as an underlying of the classic option, if the price of the DAX index rises by 2 percent, the value of the option would for example immediately change by percent. Given the theoretical leverage of 5:1.
Nonetheless, such proportionate change does not come with the new digital option. In fact, with new digital options, the value does not change at all depending on the price of the underlying. In simple digital options, the only important thing is whether the price or the price at the time of expiry of any option is higher or lower when it comes to put-options – than the new digital option was acquired.
- Maturities: Both the classic and new digital option have maturities which determine when profits are made and the odds of winning profits, i.e. point in time at which the respective option expires. In this field, digital and classic options are quite different from each other, because the profit and value level of the option is connected to the performance of the underlying. And unlike the classic options, in the new digital option, the concerned broker already gives the maximum return when purchasing the option.
This range is usually in 80 to 92 percent. In the special type of trades, there is a higher yield area which allows up to 500 percent. The bigger brokers like BDSwiss or 24Option have these options type in their programs.
- The number of Underlying Assets.
- Maximum chances of gaining profit: The difference in this matter is very apparent and can be explained easily. With classic options, maturity usually ranges between a few weeks to several months. On the other hand, with new digital options, the range is much smaller – sometimes they start even as low as 30 seconds, depending on the offer of the broker. They hardly last longer than a week. So the investors who want to make a profit quickly should consider trading in new digital options.
Which Option is Suitable for Whom?
As we can see from the description above, classic options and new digital options both share similarities as well as differences. Due to the aforementioned key figures and the significantly greater number of classic products in this category, these options mainly interests speculators who are professionals in the field and are familiar with the process. In contrast, investors who are beginners or do not want to deal with the matter choose to trade with new digital options.
Conclusion: The bottom line of the discussion is, the new digital option is simple and where the classic option is manually operated – the investor has to decide himself with the variants available if he thinks the underlying will be higher or lower at the time of expiry than the time it was purchased. Decide which one do you want depending on your need and debut on the world of trading.