What are binary options?

What are binary options? Do they have something to do with trading? Why is the expression “binary options”?

Well, I have to admit that we will end up confusing ourselves in defining “binary options” if we do not refer this phrase to a particular terminology. According to trade and finance, binary options are forms of own choice where the outcome can be either some fixed amount of asset or zero.

There are merely two types of binary options. First, it is the cash-or-nothing binary option and, second is the asset-or-nothing binary option. If the trade expires in the money, the cash-or-nothing binary option will pay some fixed amount of cash. Meanwhile, the asset-or-nothing binary option will pay the value of underlying security.

Therefore, binary options in nature go only for two possible outcomes. Some people say that the terminology is derived from European style.

One example might be useful for you. For instance, a purchase is made of a binary cash-or-nothing call option on Donald Trump’s stock struck at $200 with a binary payoff of $800. If at the future maturity date, the stock is in trade at or above $200, $800 is received, however, if its stock is in trade below $200, nothing is received.