Binary Option

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Definition of '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.

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