Binary Option

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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.  

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RELATED TERMS
  1. At The Money

    A situation where an option's strike price is identical to the ...
  2. Out Of The Money - OTM

    A call option with a strike price that is higher than the market ...
  3. Expiration Date (Derivatives)

    The last day that an options or futures contract is valid. When ...
  4. Vanilla Option

    A financial instrument that gives the holder the right, but not ...
  5. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  6. In The Money

    1. For a call option, when the option's strike price is below ...
RELATED FAQS
  1. What happens to my call options if the underlying company is bought out?

    Typically, the announcement of a buyout offer by another company is a good thing for shareholders in the company that is ... Read Full Answer >>
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