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Comparison of option types (5) – Digital Options

There are numerous types of binary options offered by brokers for trading: Touch options and No-Touch options, traditional medium-term up/down options offered by all brokers, ladder options and much more.

Every trader must answer the same questions: “Which of the options are the best for trading? Why choose a broker based on the type of options and expiry time?” In our today’s article, we are going to explore in depth digital options, which is, in fact, nothing else than a fancy name for ladder options.

Digital binary options by IQ Options

This is a type of options in which the trader determines the strike price, which is the key to the achievement of the potential profit. Same as the ladder binary options, digital options (btw. IQ Option is the only broker in the market to offer this type of options) are somewhat more complicated to understand than other types of options. Therefore I will do my best to explain this in simple terms. Let’s start with a picture.

As you can see in the picture, it is the trader who sets the strike price – like in a ladder

The picture shows the concept of digital options trading. The trader again speculates over the future price development, same as with normal binary options. This time the strike price is not limited. Therefore, the trader can choose which one he or she wants to use.

How do the digital options work?

Let’s take one more look at the picture. What we can see is the following:

  • The current price of the asset in the picture is 1.12625
  • The prices on the left hand side are as follows: 1.1267, 1.1266, 1.1265 etc.
  • When you click on the different price buttons, a different percentages (your profit) shows up

When trading digital options, it is the trader who selects from a few pre-set strike prices the one he or she wishes to use. Speculations are over the final price (…is it going to be higher or lower than the strike price?). The current closing price of a trade predetermines the future profit from the trade.

Example of trading CALL when trading ladder options (size of trade: $100)

The example in the picture shows the way it all works. (Though the picture depicts LADDER options, in reality the process is the same).

Let’s assume that the picture is a real graph. After opening a trade worth $100 upward (shown on the ladder on the right)  we can see that the profit grows proportionally with the risk. We will earn more if we believe that the price is in a strong uptrend and, before reaching the expiry date, has grown much higher.

Video: Trading of digital options

I am going to outsmart them!

Some of you may say: “Well, I am going to set the lowest strike price there is, because the chances that the price falls so low are minimal! This way I will never lose!”

Well, you are right. BUT…you must take into account that with nearly 100% certainty to win, the final profit will not be breathtaking. A trade like this may generate a profit of around 5%. This means that your profit from a USD 100 investment will be merely USD 5.  Given that what you put at stake is worth USD 100, this does not appear to be fair.

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Advantages of this type of  binary options

  • With digital options you can achieve astronomic returns (more than 300% profit)
  • Using reasonable judgement with a little luck in some cases you cannot lose (supposing you use efficient hedging)
  • Unlike ladder options offered by other traders, with digital options from IQ Option you can sell the option within the expiry time to either boost the profit (in case of a successful trade) or moderate the loss (in case of bad luck).

Disadvantages of this type of  binary options

  • On the other hand, highly rated options are highly risky.
  • This type of trading is more difficult to comprehend. Therefore it is not suitable for novices.

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J. Pro

More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn't very successfull with dropshipping on Amazon and other ways of making money online, and I'd only earn a few hundreds of dollars in years. But then binary options caught my attention with it's simplicity. Now I'm glad it did because it really is worth it. More posts by this author

8 Responses to “Comparison of option types (5) – Digital Options”

  1. I think there are 99 % chances of our winning here with our luck if we select the lowest strike although we will get the lower profit but we will not lose i am going to try this someone recommend me is it good to start with digital option?

      1. Yeah it is true i have seen it on practice account that the price increase rapidly but as compared to binary options it is 1000 times better as we can get some profit.. In binary there is pure gambling so am i right? ?

    1. I actually do this, but only when I have a trade that I’m already winning. For example if the price of an istrument is 100 when you start and I bought an OTM option with a strike at 103 and now the price is 105, I’d bought another with a 99 strike. I’ll also cover my bets buying an option in the oposite direction that could be smaller if it’s an OTM or bigger if it’s an ITM. Time, Risk and probabilities are key when trading digital options. The safest way to start is to only buy OTM’s with smaller sizes and big returns. For this I’ll use a standard 5min candlestick chart and a 1 min chart…to get the timing right.

      Also…and this is for the pros that might read this. If you’re trading EURUSD, you can watch the futures (6E) footprint chart to asses key risk areas in the 1min timeframe. This will give you a better idea of risk and probability given that you could succesfully identify absortion levels.

      With iQoption you can put a trade for the next 5min, 30 sec before the current bar is over….if you trade futures already when you see this is like watching free money.

      I’ll advise that newbies trade at lest for 3months on the demo account or until they can get consistent risk adjusted returns. If not there is a 99.9% you’ll loose all of your capital.

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