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. Binary options trading will likely continue to increase in popularity in the foreseeable future.

RELATED FAQS
  1. What's the difference between binary options and day trading?

    Binary options and day trading are both ways to make (or lose) money in the financial markets, but they are different animals. ... Read Answer >>
  2. Is it possible to trade forex options?

    Yes. Options are available for trading in almost every type of investment that trades in a market. Most investors are familiar ... Read Answer >>
  3. 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 >>
Related Articles
  1. Trading

    Trading Forex With Binary Options

    Binary options are an alternative way, with a major advantage, for traders to play the forex market.
  2. 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.
  3. 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 ...
  4. 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 ...
  5. Trading

    Trading Using Binary Options

    Discover the securities and underlying assets you can trade using binary options in the US.
  6. Trading

    How To Hedge Stock Positions Using Binary Options

    Here’s a step-by-step method to hedge your long (and short) positions in stocks, using binary options.
  7. Trading

    Arbitrage Strategies With Binary Options

    Looking for arbitrage opportunities in Binary Options? Here are the ways to encash on those, with the opportunities, risks and limitations.
  8. Trading

    How The New NYSE Binary Options Work

    The New York Stock Exchange has launched its own version of binary options called Binary Return Derivatives Options or ByRDs.
  9. Trading

    Intro to NYSE Binary Return Derivatives

    The New York Stock Exchange is entering into binary options trading. Here’s a quick introduction to how NYSE Binary Return Derivatives (ByRDs) work.
RELATED TERMS
  1. Exchange-Traded Binary Options

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

    Nadex stands for the North American Derivatives Exchange, a regulated ...
  3. Digital Option

    An option whose payout is fixed after the underlying stock exceeds ...
  4. Bermuda Option

    A type of exotic option that can be exercised only on predetermined ...
  5. Exchange-Traded Option

    An exchanged-traded option is a standardized contract to either ...
  6. Call On A Put

    One of the four types of compound options, this is a call option ...
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  3. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  4. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  5. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  6. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
Trading Center