Differences Between Binary & Digital Options

Binary options Q&A

IQ Option is one of the few online brokers that has managed to attract millions of traders from across the globe over a short amount of time. The main reason for this is their innovation and introduction of new features and instruments. One of their latest introduction is digital options trading.

This guide will look at both binary option and digital option. These are financial instruments offered by IQ Option.

What is an option

An Option is part of the derivatives types of assets. This means that their value is intrinsically tied to the value of an underlying asset.

When you buy or sell an option, you do not own the underlying asset. You’re typically speculating on whether the asset‘s price will go up or fall over a specified period. Upon trade expiry, you will either earn a profit or incur a loss.

The profit is usually calculated as a percentage of your trade investment. The total amount you could lose is your trade investment amount. However, some brokers such as IQ Option will allow you to exit position before the option expires.

Binary option trading on IQ Option

Also popularly known as high-low option, binary option trading involves speculating whether the price of an asset will rise or fall over a given amount of time. Your trade entry marks the strike price.

If you anticipate that the option will expire when the price is higher than this, all you need to do is enter a higher position. The trade expiry is always predetermined. On the IQ Option platform, this ranges from 1 minute to 1 month.

IQ Option binary trades always have a fixed return which is calculated as a percentage of the trade investment. The return you receive depends on the asset being traded and market volatility.

Digital option trading on IQ Option

The digital option combines the power of binary option and the increase in price of the underlying asset. So rather than have a fixed return, the return for a digital option is calculated based on how far away the price moves from the strike price.

The further away the price moves, the higher the return. This means that you can potentially earn up to 900% return on investment when trading digital option. The trade expiry for digital option is 1 minute, 5 minutes and 15 minutes on the IQ Option platform.

Similarities between binary option and digital option asset types on IQ Option

Both option types have a predetermined expiry. Once the expiry period is reached, the position is automatically closed. The trade expiry for both is indicated by a vertical red line on your chart.

trade expiry line
Trade expiry

Both option types require you predict whether the price will be higher or lower than the strike price on trade expiry.

IQ Option offers binary option and digital option for currency pairs and commodities.

Differences between binary option and digital option on IQ Option

Binary option trading is dependent on the direction of the price relative to the strike price. That is, whether the price will be higher or lower than the strike price at trade expiry.

Digital option trading on the other hand is dependent on both the direction and the price distance from the strike price. That is whether the price will be higher or lower as well as how far away the price will be at trade expiry.

The return for binary option trading is fixed and predetermined at trade entry. The return for digital option trading on the other hand fluctuates as long as the trade remains open.

With binary option trading, the maximum amount you can lose is your trade investment. With digital option trading, your losses can be higher than your trade investment. The further away the prices move from your prediction, the higher your percentage loss.

Binary Option have expiry periods ranging from 1 minute to 1 month. The digital option on the other hand has trade expiry periods lasting 1 minute, 5 minutes or 15 minutes.

Trading binary option on IQ Option

Once you’ve logged into your trading account, click on the select assets feature (plus sign at the top of your trading interface).

binary option choosing instrument

Next, select options then binary. Choose the asset pair you want to trade with. Use a Japanese candles chart with 5 minute interval candles.

setting up binary option to trade

After analyzing the chart, enter the amount you want to trade. Next, enter the trade expiry. While using 5 minute candles, the minimum expiry should be 5 minutes.

You can learn more about trading candles in The Ultimate Guide for Trading Candles on IQ Option.

Trading digital option on IQ Option

Once you’ve logged into your IQ Option account, click on the select assets feature. Click on options and then select digital. Next, choose the assets you want to trade with.

digital option choosing instrument

Set up a Japanese candles chart with 5 minute interval candles.

At the right of your chart, you’ll see sets of boxes with prices in them. If you hover your cursor over these boxes, you’ll notice that the higher and lower buttons have possible percentage profits you can earn. For example, if the higher button shows a +250% profit, it simply means that you can make this amount if the price is higher than the strike price (price cursor is at) upon trade expiry.

setting up digital option to trade

Once you’ve analyzed the chart and determined the direction the price will take, follow these steps:

  1. Select the strike price
  2. Enter your trade amount
  3. Select the trade expiry
  4. Select direction (higher or lower)

Conclusion

As you’ve seen, binary option and digital option have similarities and differences. Digital options have a higher risk-return compared to binary options. Now that you’ve learned about both, try them out in your IQ Option practice account today. We’d love it if you share your experience in the comments section below.

Good luck!

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