A digital option is an option that allows traders to speculate on the movement of the prices of a financial asset. It works by setting a manual price like a target known as the strike price. Traders predict the current price movement, if their predictions come true, they get a fixed payout. If they lose their prediction, they lose the capital they used to buy the digital option. It only has two chances, whether the current price will go past the strike price or not. Traders have to use their tools and strategies and decide.
There are many types of digital options that traders can choose. It is also a risky market to venture into, but it has high profits if you master how to open and close positions and how the options markets work.
Digital options in a nutshell
- Digital options allow traders to speculate on financial asset price movements, using a strike price.
- Traders predict price movements, earning fixed payouts if predictions are correct, but losing capital otherwise.
- Types of digital options: Up/Down, One-touch, Ladder, Range, and Tunnel.
- Traders can make up to 900% profits but face risks, with low investments and accessibility.
How do digital options work?
Digital options work when traders open trading positions depending on how they predict the price movement. It offers two options, a call and a put which vary depending on the strike price. The strike price is the price that traders select, which defers the current price.
They can set the strike price above or below the current market price. If you set the strike price higher than the current price, you are predicting that the current price has to move above the market price within the period.
Similarly, when you set the strike price lower, they predict the price will decrease to that price within the set time. They choose the type of asset they want to trade and the strike price to estimate if the market price will hit the strike price at a given time.
If a trader believes that the market price can move higher than the strike price, they buy the asset by clicking the call option. If the market prices exceed the strike price by a pip they win and get a fixed payout set for that asset.
If a trader believes market prices will move lower, they select the put option. The maximum trade size that you can open a position is $10,000, while the minimum is $1.
What are the expected outcomes of trading a digital option?
Once you select an asset, pay the premium, which is the least amount and set the time and conditions of the trade, here is what you should expect from the trade.
- If your predictions are correct and the market prices move beyond the strike price within the period set, then you make profits in addition to the capital you placed.
- If the market prices do not hit the strike price within the specified period, then you lose the capital you invested for that trade.
- If the period is over with the market price and the strike price at the same level, you also lose the trade. The conditions are that the market prices move to the strike price and above the strike price.
Traders can lose all their investments when trading digital options, or they can make profits of up to 900%. The profits depend on the amount of investment you risked and the distance of the strike price. If the strike price is further than the market prices, it has higher returns but more risks of losing.
Traders can also opt to exit the position before the time elapses if they feel the trade is not going according to their predictions. The time depends on the type of forex broker, some have from 1 minute to 30 minutes or even an hour.
Advantages and disadvantages of digital options
Digital options present various advantages and disadvantages for traders. The following table provides a concise overview of the key pros and cons:
- High Profits: Traders can make profits as high as 900% by accurately predicting price movements.
- Risk Management: Easily manage risks by setting a lower strike price and exiting trades if market prices deviate from predictions.
- Accessibility: Available for trading on any device, including mobile, laptop, or desktop computer.
- Low Investments: Traders can open positions with as little as $1 to $500, catering to both experienced and beginner traders.
- Comprehensible: Digital options are easy to understand and require less educational input, emphasizing technical analysis.
- High Risks: Trading digital options can lead to up to 100% losses on investments, requiring careful consideration.
- Limited Trading Instruments: Digital options offer a restricted range of trading instruments compared to other options.
Types of digital options
Up / down options
It is a digital option in that you set a strike price, and you decide whether the market will move past the strike price. The trader has to estimate if the prices will move above or below the strike price before the time ends.
If they determine that the price of an asset will move above, they profit when prices move above the target price. If they chose below, they make profits when the market prices move below the strike prices.
One-touch
It is a digital option that allows traders to profit if the asset touches the strike price before it expires. If the trader predicts the price will touch the strike price, they buy if they don’t see the price touching the strike price in time, buy the put option.
The one-touch option allows the market price to only tough the target/strike price for the trade to be profitable.
Ladder
The ladder digital option is when a trader has some series of levels that a market price needs to reach before the strike price. It means that there are some prices set that the market price has to achieve at a given time.
These prices are set like the steps of a ladder and are known as rungs. It also means when the prices achieve these rungs within the expiry time, there is a percentage of the total payout that the trader will get.
Range
It is a digital option in which a trader sets two strike prices which they believe the market price will fall for the period of the time the trade will be open. If they predict the market prices will fall between the range of prices, they buy the call option, and they can make profits.
If their predictions are wrong, they lose the trade and the capital they invested in the trade. It is an option to use when you think the market will be stable at a price.
Tunnel
It is the opposite of the range options such that the trader sets strike or target prices which they believe that the market price will not move past. It is effective when you think that the market price will be stable for the trade duration.
At the time, the trader can set the tunnel option as within the target prices, which means they predict the market prices will stay within the tunnel. They can also set it as outside the tunnel, which means they predict the prices will move past any barriers before the trade expires.
High low
This type of digital option allows you to predict if the prices of an asset will move high or low. The trader sets the time they believe the asset, will have gone high or low before time expires. If the prediction is correct, then you get a percentage of profit and the investment placed.
It is a popularly used option offered by many forex brokers. It is a digital option with a lower profit percentage than other options.
Digital Options vs Binary Options
Similar to binary options, digital options involve predicting whether an asset’s price will surpass or dip below a specified point at a predetermined time. The flexibility of digital options, however, allows traders to manually select the desired strike price, providing greater control over risk and potential profits.
Similarities
- Price Movement Predictions: Both digital and binary options necessitate forecasting price changes.
- Expiration Period: Positions automatically close at a specified expiry time.
- Binary Outcomes: The trade culminates in either a correct or incorrect prediction.
- Transparent Risks and Rewards: Traders are aware of potential profit and loss upfront.
Differences
Despite their similarities, there are differences between digital and binary options when certain factors are analyzed.
| Distinctions | Binary Options | Digital Options |
|---|---|---|
| Variables | Traders predict asset value increase or decrease. | Investors have more control as they set the price of the shares. |
| Expiry Period | Variable periods, ranging from a minute to a month. | Short-term, with expiry times typically 1 to 15 minutes. |
| Closing an Option | Options cannot be closed before expiry. | Traders can close positions early in order to realize larger profits. |
| Profit | Fixed return on investment. | Increased potential by setting strike price further from current market price. |
Conclusion – Digital options are a great chance, but not risk-free
Many people have joined options trading because of the high profits yielded to the correct predictions. Traders have to have industry-leading trading tools to use when they want to estimate the general direction of a trading asset.
It is imperative to understand how to conduct technical analysis, choosing the appropriate asset, the target prices, or the time. Traders should also practice trading these options on the demo account before trading on the live trading account.
How do digital options work?
Traders predict price movement by selecting a strike price above or below the current market price. If the market moves as predicted within the set time, traders profit; otherwise, they lose their investment.
What are the expected outcomes of trading a digital option?
Correct predictions result in profits, including the initial capital. If the market prices don’t hit the strike within the specified time, traders lose their investment. If prices match the strike at expiration, the trade is also lost.
What are the advantages of trading digital options?
Digital options offer high profits (up to 900%), effective risk management, accessibility on various devices, low investment entry (from $1 to $10,000), and simplicity, requiring less educational input.
What are the disadvantages of trading digital options?
Disadvantages include the potential for high risks leading to 100% loss, a limited range of trading instruments, and the need for careful consideration in decision-making.
