WHAT IS BINARY TRADING?

WHAT IS BINARY TRADING? - EXPLAINED

A binary option is a financial option in which the payoff is either some fixed monetary amount or nothing at all. While binary options are used in a theoretical framework as the building block for asset pricing and financial derivatives (a binary option maps to the cumulative distribution function of the risk-neutral distribution^]), they have been exploited by fraudulent operations as many binary option outlets (outside regulated markets) have been shown to be scams.

The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security.

Binary options are based on a 'yes' or 'no' proposition.

For example: Will the price of an asset be above $50 at 2:30 p.m. today?

If you believe it will be, you buy the binary option. If think it will be below $50 at 2:30 p.m., then you sell this binary option.

Let's assume you decide to buy at $42.50. If at 2:30 p.m. the the price of that asset is above $50, your option expires and it becomes worth $100. You make a profit of $100 - $42.50 = $57.50 (less fees).

But if the price is below $50 at 2:30 p.m., the option expires at $0. Therefore you lose the $42.50 invested.

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