Getting Started With Binary Options
Binary options are a type of option where the payoff is either a fixed amount of an asset or nothing. The two main types of binary options are “cash-or-nothing” binary options and “asset-or-nothing” binary options.
The cash-or-nothing option pays a fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security.
The options are binary (or digital) because there are only two possible outcomes. They are also called all-or-nothing option or, digital options (more common in forex/interest rate markets).
For example: a purchase of a binary cash-or-nothing call option on ABC Corp’s stock struck at £100 with a binary payoff of £1000. Then, if at the future maturity date, the stock is trading at or above £100, £1000 is received. If its stock is trading below £100, nothing is received.