Definition of 'Binary Option'
- Some fixed amount of some asset
- Nothing at all
- Cash-or-Nothing binary option
- Asset-or-Nothing binary option
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.
- 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.
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