DEFINITION of 'Exchange-Traded Binary Options'

Exchange-traded binary options, regulated by the CFTC, let you speculate on the price of some of the most heavily traded forex, commodities and stock indices markets with short-term hourly, daily or weekly expirations.  The all-or-nothing trade (hence the term binary) is a derivative, meaning you don’t actually buy or sell the asset itself.  Binary options have a fixed payout, so you know your potential profit—or loss—ahead of time.   Exchange-traded binary options have transparent pricing and no counter-party risk, unlike those traded over-the-counter.

BREAKING DOWN 'Exchange-Traded Binary Options'

Binary options trading is simply making a true or false prediction about the direction of a market and main benefits include short-term expirations, straight-forward risk/reward profiles, defined risk and low collateral required to trade. Binary option contracts always settle between 0 and 100 at expiration but traders can liquidate the contract at any point before expiration limiting losses or locking in gains. 

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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. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  3. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
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