WHAT IS A BINARY OPTION?
A binary option is an option where a trader specifies an amount of payout that he will receive if he is correct about the targeted price action. This target is known as a barrier. If the trader is wrong, he receives nothing at all. So it’s an all-or-nothing situation. In contrast, then, to a plain vanilla call or put, it doesn’t matter how far the price is in the money, the trader receives only the amount specified. The trader also sets the time to expiration. Another key difference is that in the binary option, the underlying contract is not the spot currency, but rather is the event itself. One of the major questions facing the firm and the trader of barrier options is whether there has been a “touch” event. To avoid controversy about whether a barrier has been reached, there is an authoritative foreign exchange committee that has set forth specific conditions that define the “touch” event.
