A:

Binary options trading is option trading for which there are two possible results. A trader purchases an option and at the expiration of the option period. If the option is profitable, it generates approximately an 80% return on the trader's investment. If the option is not profitable, the trader loses whatever amount of money he had paid for the option. Binary options are very simple to trade, even for inexperienced investors, and binary options trading requires very little starting capital – usually no more than a few hundred dollars.

Binary options trading for the average retail trader essentially began with the U.S. Securities and Exchange Commission's approval for exchange trading of these options in 2008. Since then, it has expanded and spread very rapidly. Binary options had, in fact, existed for many years before 2008, but they were previously available only to large, institutional traders or high net worth individuals through the over-the-counter market. In 2007, the Options Clearing Commission recommended changes in binary options trading that would make them freely available for retail traders, and in 2008, the SEC approved the offering of binary options as a tradeable investment instrument. Shortly thereafter, the Chicago Board Options Exchange (CBOE) and the American Stock Exchange began offering binary options for public trading.

Early on, binary options trading was still complex and challenging for retail traders. Initially, only call options were available on the CBOE. Two factors led to the explosion of binary options trading: first, the broadening of the types of options available, accompanied by significant improvements in trading platform software that greatly simplified the trading of binary options. Another factor was the introduction of binary options in forex trading, where they gained popularity much more quickly than they had in stock and futures trading.

Today, there is growing flexibility in binary options trading. Traders can specify not only the amount of money they wish to risk on an option, but its strike price and expiration period. It is possible to purchase insurance on a binary options trade by opting for a lower payout percentage, in exchange for which the trader will only lose part – rather than all of his option investment – if the option is not profitable at expiration.

Binary options are available across virtually all tradeable financial assets, with a variety of contract types and expiration periods ranging from one minute to one year. There are hedge funds that primarily focus on binary options trading. In the forex markets, binary options trading was initially only available through specialized brokers. Recently, regular forex brokers have added binary options trading platforms for their clients. The likelihood is that binary options trading will continue to increase in popularity in the foreseeable future.

RELATED FAQS
  1. How can I find out which stocks also trade as options?

    The trading of options has become increasingly popular among retail investors as they become aware of the many different ... Read Answer >>
  2. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
  3. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>
  4. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  5. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
Related Articles
  1. Trading

    A Guide to Trading Binary Options in the U.S.

    What binary options are, how they work and where you can legally trade them in the United States.
  2. Trading

    Common Misconceptions About Binary Options - Sponsored by Nadex

    There are many misconceptions about binary options, so it is really important that traders understand exactly what they are--and what they are not--in order to use them effectively.
  3. Trading

    Binary Options FAQs - Sponsored by Nadex

    Many investors may not be familiar with binary options, but they’re actually quite easy to use. And they can play an important role in your investing strategy. Here are some of the more common ...
  4. Trading

    Applying Binary Options To Equity Markets

    A binary option payout depends on the outcome of a “yes” or “no” proposition, related to the difference between underlying asset price and strike price.
  5. Trading

    Trading Forex With Binary Options

    Binary options are an alternative way, with a major advantage, for traders to play the forex market.
  6. Trading

    What You Need to Know About Binary Options Outside the U.S.

    Binary or digital options are a simple way to trade price fluctuations in multiple global markets.
  7. Trading

    How To Hedge Call Options Using Binary Options

    Here is a step-by-step walk through how to hedge a long call position with binary options.
  8. Trading

    Introduction To Binary Options - Sponsored by Nadex

    Binary options may sound complicated, but they're really not. In fact, they offer traders alternative ways to trade stock indices, commodities and currencies-even economic events. Say you think ...
  9. Trading

    Binary Options

    A type of option where the payoff depends on both the price levels of the strike and the underlying asset, like standard options. If the binary option expires in the money, the trader will always ...
RELATED TERMS
  1. Exchange-Traded Binary Options

    Exchange-traded binary options, regulated by the CFTC, let you ...
  2. Binary Option

    A type of option in which the payoff is structured to be either ...
  3. Currency Binary

    A currency trade that offers an all-or-nothing payoff based on ...
  4. Nadex

    Nadex stands for the North American Derivatives Exchange, a regulated ...
  5. Spot Premium

    The money an investor pays to a broker in order to purchase a ...
  6. Cash-Or-Nothing Call

    An exotic option whose payoff is a predetermined amount (sometimes ...
Hot Definitions
  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  2. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  3. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  4. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center