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Binary Option

A binary option is a type of option with a fixed, all-or-nothing payout: the holder receives a set amount if a specified condition is met at expiration, and nothing if it is not.

What Is a Binary Option?

A binary option is a contract linked to an underlying asset, such as a stock, stock index, currency pair, or commodity. Its name reflects its two possible results. At a set time, known as the expiration, the contract either pays a fixed, predetermined amount or pays nothing. There is no partial payout, and the size of the price move does not change the result.

Binary options belong to the family of derivative contracts, meaning their value depends on the price of something else. They are sometimes called digital options because of this all-or-nothing structure.

How It Works

Most binary options pose a yes-or-no question about the underlying asset's price. A call-style contract pays out if the price is above a specified level, called the strike price, at expiration. A put-style contract pays out if the price is below it. Buyers pay an upfront option premium to enter the trade. If the condition is met, the contract pays its fixed amount. If it is not, the buyer loses the premium and receives nothing back.

Because the payout is set in advance, a buyer knows the most that can be lost, which is the premium, before the trade begins. The seller of the contract takes the opposite side of the outcome.

Example

Consider a contract that pays a fixed amount if a stock index closes above a stated level on a particular day. The buyer pays a premium for the chance to win that payout. If the index closes above the level, the buyer receives the payout, which is set by the contract's terms and is usually larger than the premium. If the index closes at or below the level, the buyer keeps nothing and the premium is lost. The outcome depends only on which side of the level the price lands, not on how far it moved.

Risks and Regulation

Binary options are simple to describe but carry significant risks. The entire premium can be lost on a single trade, and the outcome often depends on one price reading at one moment. Because the structure is easy to market, it has attracted fraudulent operators and misleading sales practices. For these reasons, several regulators, including authorities in the European Union and the United Kingdom, have restricted or banned the sale of binary options to retail investors. Investors who want to understand these products should read the contract terms carefully and check the regulatory status of any provider.

Updated October 27, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Underlying Asset

An underlying asset is the financial instrument or commodity on which a derivative's value depends, such as a stock, bond, index, currency, or physical commodity.

Derivative

A derivative is a financial contract whose value depends on, or is derived from, the price of an underlying asset, index, interest rate, or other reference point.

Strike Price

The strike price is the fixed price at which the holder of an option can buy or sell the underlying asset, such as a stock, when the option is exercised.

Option Premium

The option premium is the price a buyer pays the seller to acquire an options contract, which the seller keeps whether or not the option is exercised.

Options

An options contract gives the holder a right, not an obligation, to buy or sell an underlying asset at a set strike price by expiration, for a premium paid to the seller.

Call Option

A call option is a contract that gives its buyer the right, but not the obligation, to buy a specified quantity of an underlying asset at a set price before or on a set expiration date.

Put Option

A put option is a contract that gives the buyer the right, but not the obligation, to sell a specified amount of an underlying asset at a set price before or on a set expiration date.

Digital Option

A digital option is an option that pays a fixed amount of money or nothing at all at expiration, depending on whether the underlying asset finishes above or below a set strike price.