So… What Exactly Are Binary Options?

Options trading has become extremely popular among retail stock traders over the past decade. One new, controversial cousin of the traditional stock option contract has gotten a lot of attention in the past couple of years: binary options.

What Is A Binary Option?

Like a traditional stock option contract, a typical binary option contract is a bet that the price of a stock or other asset will be above/below a specific strike price at a specific time in the future. However, the key to binary options is that there are only two possible outcomes if the contract is held to expiration: profit a specific, predetermined amount, or lose 100 percent of the investment.

How Does A Binary Option Work?

The most common type of binary option is a “high-low” option. A typical high-low option works like this: A trader starts with a belief that a stock price will rise or fall within a certain amount of time. For example, imagine that Bank of America stock is trading at exactly $17.00 with 15 minutes left in the trading day. A binary options trader that believes that Bank of America will finish the day above $17.00 might buy $100 of binary “call” options for Bank of America with a strike price of $17.00 and a 70 percent payout.

If this trader buys and holds these options until they expire (15 minutes later), one of two things will happen: either the stock will close above $17.00 and the trader will profit $70, or the stock will close below $17.00 and the trader will lose $100. Regardless of whether the stock closes at $17.01 or $17.51, the binary option only pays out the predetermined 70 percent rate.

What Are The Pros Of Binary Options Trading?

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