Binary Option

AAA

DEFINITION of 'Binary Option'

A type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. The success of a binary option is thus based on a yes/no proposition, hence “binary”. A binary option automatically exercises, meaning the option holder does not have the choice to buy or sell the underlying asset.

INVESTOPEDIA EXPLAINS 'Binary Option'

Investors may find binary options attractive because of their apparent simplicity, especially since  the investor must essentially only guess whether something specific will or will not happen. For example, a binary option may be as simple as whether the share price of ABC Company will be above $25 on November 22nd at 10:45 am. If ABC’s share price is $27 at the appointed time, the option automatically exercises and the option holder gets a preset amount of cash.

Binary options are significantly different from vanilla options. They are occasionally traded on platforms regulated by the SEC and other regulatory agencies, but are most likely traded over the Internet on platforms existing outside of regulations. Because these platforms operate outside of regulations, investors are at greater risk of fraud. For example, a binary options trading platform may require the investor to deposit a sum of money to purchase the option. If the option expires out-of-the-money, meaning the investor chose the wrong proposition, the trading platform may take the entire sum of deposited money with no refund provided.  

RELATED TERMS
  1. Asset-Or-Nothing Call Option

    A derivative security for which there is no payoff unless the ...
  2. Asset-or-Nothing Put Option

    An option payoff that is equal to the asset's price if the asset ...
  3. Cash-Or-Nothing Call

    An exotic option whose payoff is a predetermined amount (sometimes ...
  4. Cash-or-Nothing Put

    An exotic option whose payoff is a specified fixed price (sometimes ...
  5. Expiration Date

    The last day that an options or futures contract is valid. When ...
  6. At The Money

    A situation where an option's strike price is identical to the ...
Related Articles
  1. This article is based on binary options issued outside the U.S.
    Options & Futures

    What You Need To Know About Binary Options ...

  2. Options & Futures

    The Benefits And Value Of Stock Options

  3. Options & Futures

    The 4 Advantages of Options

  4. Options & Futures

    What happens to my call options if the ...

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center