Binary Option

A Binary Option is a type of option where the payoff is either:

• Some fixed amount of some asset
• OR
• Nothing at all

Binary Options fall into two primary types:

• Cash-or-Nothing binary option
• Asset-or-Nothing binary option

Cash-or-Nothing binary option example
This type of option pays a fixed amount of cash if the option expires in-the-money. For example, if you bought a binary cash-or-nothing put option on IBM with a strike price of $200 with a binary payoff of $2,000 and at the maturity date IBM is trading at or under $200 then you will receive $2,000. Conversely if IBM is trading over $200 then you will receive nothing.

More facts

• The options are binary in nature because there are only two possible outcomes.
• Other names include
• All-or-nothing options
• In Forex and Interest rate markets they are called digital options
• On the American Stock Exchange (AMEX) they are called Fixed Return Options (FRO).
• Binary options are usually European-style options. This means that they cannot be exercised until the expiration date.