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.  

VIDEO

Loading the player...
RELATED TERMS
  1. At The Money

    A situation where an option's strike price is identical to the ...
  2. Vanilla Option

    A financial instrument that gives the holder the right, but not ...
  3. Cash-Or-Nothing Call

    An exotic option whose payoff is a predetermined amount (sometimes ...
  4. Expiration Date (Derivatives)

    The last day that an options or futures contract is valid. When ...
  5. Cash-or-Nothing Put

    An exotic option whose payoff is a specified fixed price (sometimes ...
  6. In The Money

    1. For a call option, when the option's strike price is below ...
RELATED FAQS
  1. What is the history of binary options?

    Binary options trading is option trading for which there are two possible results. A trader purchases an option and at the ... Read Full Answer >>
  2. What are some examples of financial spread betting?

    Financial spread betting is available across a wide array of markets. Financial spread betting is primarily aimed at making ... Read Full Answer >>
  3. Why is the Chicago Board Options Exchange important?

    The Chicago Board Options Exchange (CBOE) was the very first exchange to offer standardized exchange-traded options on stocks. ... Read Full Answer >>
  4. 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 >>
  5. If a long call is owned on the record date of a stock, is the owner of the option ...

    The owner of a long call for a stock is entitled to a dividend only if the option is exercised prior to the ex-dividend date, ... Read Full Answer >>
  6. How can an investor profit from the cyclical nature of the electronics sector?

    An investor can profit from the cyclical nature of the electronics sector in two ways. He can employ sector rotation, shifting ... Read Full Answer >>
Related Articles
  1. Options & Futures

    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.
  2. Options & Futures

    The Benefits And Value Of Stock Options

    The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options.
  3. Options & Futures

    The 4 Advantages of Options

    Flexible and cost efficient, options are more popular than ever. Find out why.
  4. Options & Futures

    How To Trade Orange Juice Options

    How do orange juice options work and which factors determine the orange juice valuations? Here's a sneak peak into the world of orange juice options.
  5. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.
  6. Options & Futures

    Why Is Best Buy Stock So Volatile?

    We look at why BBY has been so volatile in the past and whether this trend is likely to continue or abate in the future.
  7. Investing Basics

    What is a Stock Option?

    An employee stock option is a right given to an employee to buy a certain number of company stock shares at a certain time and price in the future.
  8. Options & Futures

    Circumvent Limitations of Black-Scholes Model

    Mathematical or quantitative model-based trading continues to gain momentum, despite major failures like the financial crisis of 2008-09, which was attributed to the flawed use of trading models. ...
  9. Retirement

    Don't Make These Top 10 Mistakes On Your Roth IRA

    Don't lose out on the benefits of a Roth by contributing too much, breaking rollover rules or making other avoidable errors.
  10. Trading Strategies

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.

You May Also Like

Hot Definitions
  1. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  3. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  4. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  5. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
Trading Center