The similarities end with greek-sign. There is no leverage in vanilla risk-reversals or conversions, beyond what is seen to 100d. It's only slightly more advantageous than being long or short stock under RegT. Placing a binary event dramatically increases gearing. There is simply no way to replicate the leverage:notional exposure with vanilla options. Consider the following: DAX cash is trading 4910 and you're looking to trade a bear-delta position into what you believe is an imminent-drop in equity valuations. You buy a barrier-k/o range struck at 4925 and 4775. The gamma surface looks like the dark side of K2. It's vertical. The position is incredibly cheap due to the gamma-position. You're 15 points away from the upside event in which you lose your entire debit. You can trade the barrier k/o so cheaply since the $risk is inverse to gamma position/vega and the binary-risk. It would involve more vega with longer-term expirations.
Yes, I guess the closest way to replicate that would be a short dax future position with a stop loss 15 points above; but even that would not have the same leverage, as there is a deposit required to trade futures. Do you ever trade digitals as well?
They're synonomous. Any cash{asset} or nothing, discontinuous payoff option can be termed a digital or binary. I trade the americans, as the euro-style are far more costly. If spot has traded through the barrier I'd rather not be holding the Euro in hopes the spot will revert at expiration. I'd rather trade the discounted-american variant.
Oh, well how about those options that have a fixed payoff that is paid only at expiry if the underlying trades above/below a certain level. Very useful for delta hedging. Whatever they're called
Long 25 FDAX Sep from 4967 into the 4980 cash barrier, currently trading 4959 on cash. Exotic goes OTB at Noon EDT.
Sold 87.50 on 50... +15k EUR. +57k EUR on hedge since inception of this evil barrier trade. Looks like we'll hit Dax 4980 any second. There was no point in holding the hedge any longer as I had intended to offset when/if the barrier is reached.
Hit the barrier... out the 59.5k EUR debit. Earned $57k on FDAX hedging. Net loss on trade of 2.5k EUR -- net gain since inception of all Dax exotics: +2.5k EUR.