Binary Option Description and History

Dec 29, 2015, 08:58 AM

A binary option, in finance, refers to an option where the payoff is either a specific amount of a particular asset or nothing at all. It is called a binary option because of its binary nature where only two outcomes are possible. This kind of contract is also known as an all-or-nothing, digital, or fixed return option.There are basically two types - the cash-or-nothing option that pays a fixed amount of currency if it expires in the money; and the asset-or-nothing option which pays the value of the underlying assets.

This financial instrument is attractive because it is structured in such a way that significant payouts are possible even with seemingly insignificant moves in the market, compared to the standard option where significant market movements usually are required before any payout can happen. The investors get a return in the form of a fixed payout. This is based on whether the market rises above or falls under a given level at a particular time. The buyer can, therefore with a binary option, look for specific payoffs even with minimal movements in the financial instrument.

One of the main benefits of trading binaries is that the traders are not faced with the various issues associated with the traditional stocks and commodities options. Such binary option contracts are usually short-term options that do not carry significant risk. Although digital options do not seem to be flexible enough, they are very easy to trade. The market is comparatively easy to understand and a trader can immediately learn the advantages relative to other options markets the moment he decides to deal with these instruments.