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.