Binary options basically vary from conventional options in the way the option payout is structured. The payout of a binary option relies solely on the outcome of a “yes” or “no” proposition that is related to whether the price of the asset underlying the option is trading above or below a specified level or strike price at expiration. Binary options allow a trader to speculate on outcomes. Binary options are now present on a growing range of equity indices, commodities, currencies, and economic events from firms like Nadex, and even on individual stocks from other firms.
A buyer of a call binary option will receive a pre-determined fixed payout if the asset price is above the strike price at expiration. But if the asset price is trading below the strike price at expiration, the call binary option expires worthless. In the same manner, the buyer of a put binary option receives a fixed payout if the asset price is below the strike price at expiration. If the asset price is trading above the strike price at expiration, the put binary option expires worthless.
This fixed payout or nothing feature is what gives the binary option its name. Contrast this with conventional options, where the payout from a call option that is in-the-money depends on how far the price of the underlying asset is above the strike price at expiration. Similarly, for a conventional in-the-money put, the payout depends on how far the price of the underlying asset is below the strike price at expiration.