Binary Option
A binary option is a contract that pays a fixed, predetermined amount if a specified condition is met at expiration — such as a stock closing above a certain price — and pays nothing if the condition is not met.
Unlike standard options, where the payout scales with how far the underlying moves beyond the strike price, a binary option delivers an all-or-nothing outcome. If the condition is satisfied, the holder receives a fixed cash amount, often $100 per contract. If the condition is not satisfied, the contract expires worthless and the buyer loses the premium paid. This simplicity is both the defining characteristic and a common source of misunderstanding.
In the U.S., the most legitimate venue for binary options on regulated exchanges is the North American Derivatives Exchange (Nadex), which offers binary contracts on equity indices, forex pairs, and commodity prices with standardized terms and clearing through a registered derivatives exchange. Separately, the CBOE previously listed binary options called CDOs (Credit Default Options) and event contracts, though the product lineup has evolved over time.
Binary options gained a notorious reputation during the 2010s because of widespread fraudulent offshore trading platforms that marketed unregulated binaries to retail customers. The SEC and CFTC issued numerous warnings and enforcement actions against these operators, many of which were found to manipulate payouts, refuse withdrawals, or operate outright Ponzi schemes under the guise of binary option trading. Legitimate binary products on regulated U.S. exchanges are fundamentally different from these offshore schemes.
From a theoretical standpoint, a digital or binary call option corresponds to the cumulative probability distribution component of the Black-Scholes formula — it is closely related to the N(d2) term, representing the probability that a standard call option will expire in the money. Professional options traders sometimes use binary options to trade narrow event outcomes, such as whether a particular price level will be breached by a specific time.
For retail traders in the U.S., the practical takeaway is to avoid any binary option platform that is not registered with the CFTC or SEC, and to understand that the fixed-payout structure means there is no path to larger-than-stated gains regardless of how far the underlying moves.