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 use Bollinger Bands® to trade binary options?

    Learn how to use Bollinger Bands to trade binary options. Bollinger Bands are derived from price and signal overbought and ... Read Answer >>
  4. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
  5. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>
Related Articles
  1. Trading

    A Guide to Trading Binary Options in the U.S.

    What binary options are, how they work and where you can legally trade them in the United States.
  2. Trading

    Common Misconceptions About Binary Options - Sponsored by Nadex

    There are many misconceptions about binary options, so it is really important that traders understand exactly what they are--and what they are not--in order to use them effectively.
  3. Trading

    Binary Options FAQs - Sponsored by Nadex

    Many investors may not be familiar with binary options, but they’re actually quite easy to use. And they can play an important role in your investing strategy. Here are some of the more common ...
  4. Trading

    Applying Binary Options To Equity Markets

    A binary option payout depends on the outcome of a “yes” or “no” proposition, related to the difference between underlying asset price and strike price.
  5. Trading

    Risk and Reward of Binary Options Outside the US

    Binary options offer a simple way to trade price fluctuations in global markets, but they’re not the same as traditional options.
  6. Trading

    Trading Forex With Binary Options

    Binary options are an alternative way, with a major advantage, for traders to play the forex market.
  7. 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.
  8. Trading

    How To Hedge Call Options Using Binary Options

    Here is a step-by-step walk through how to hedge a long call position with binary options.
RELATED TERMS
  1. Exchange-Traded Binary Options

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

    A type of option in which the payoff is structured to be either ...
  3. Currency Binary

    A currency trade that offers an all-or-nothing payoff based on ...
  4. Digital Option

    An option whose payout is fixed after the underlying stock exceeds ...
  5. Cash-Or-Nothing Call

    An exotic option whose payoff is a predetermined amount (sometimes ...
  6. Forex Option & Currency Trading Options

    A security that allows currency traders to realize gains without ...
Hot Definitions
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  2. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
Trading Center