Understanding Binary Options

A Binary Option is a type of option where the trader chooses a yes or no position on the price of a financial asset, and the resulting payoff is all or nothing. Because of this characteristic, Binary Options can be easier to understand and trade than traditional options.

Binary Options are cash-settled as European-style options, which means they can only be exercised on the expiration date. If, at expiration, the options settle in-the-money, the buyer or seller of the options receives a pre-specified dollar amount. Similarly, if the options settle out-of-the-money, the buyer or seller receives nothing. This gives a known upside (gain) or downside (loss) risk assessment. Unlike traditional options, Binary Options provide full payout no matter how far above (or below) the option settles from the strike price.

Despite the term "all or nothing", depending on the actual trading platform, "nothing" can actually mean "something". This means that at expiration time the owner of the option may actually get a certain payout amount, even if the option expired "out of the money".

Despite the term "all or nothing", depending on the actual trading platform, "nothing" can actually mean "something". Sometimes the owner of an option that settles out-of-the-money may receive a certain payout amount, even if the option expired "out of the money".

Very often you may come across binary options in another name. In the foreign exchange market Binary Options are known under the name of digital options.