A binary option is a financial contract with a binary payoff structure. At expiration, it pays a pre-determined amount if a specified condition is true, and nothing if the condition is false. If you get paid or not only depends on if this condition is met, and not on how much it is met. You do not get paid more for being “more right”.
Binary options are financial derivatives and the specified condition is tied to the behavior of an underlying asset or product.
Example:
The share price of Apple Inc. (AAPL) stock will be above $200.00 at 10 a.m.
If you buy this binary option, and your prediction comes true at 10 a.m., you will get paid. If your prediction turns out to be wrong, you lose the entire stake.
Binary options typically pay a percentage of the stake when they pay out.
Example: You purchased a binary option for $100 with a payout rate of 90%. If your prediction comes true, you get a $190 payment. In other words, you get your $100 stake back + a $90 profit.
At expiry, a binary option either pays the quoted return (because the statement is true) or pays nothing (because it is false). There is no partial credit, no scaling with how far the price moved, and you can not use stop loss and take profit orders. This yes-or-no payoff is the defining feature of the binary option. It makes the product easy to understand, but also unforgiving when your timing is even slightly off, because a one-tick miss is treated the same as being miles away from your target.
Regulation
Binary options can be traded on regulated and licensed exchange markets that list standardized binary contracts and allow proper two-way trading and early exit. These sit under securities or derivatives rules and clear like any other listed product. Most retail clients, however, do not access binary options through this type of venue. Instead, they register with on of the many online platforms where your “broker” (the platform company) is also your counterpart in each trade. The platform controls the whole ecosystem, including everything from pricing to price feeds, and there is no independent clearinghouse. What makes this situation especially precarious for the trader is that many of these sites are based in countries known for having very lax trader protection.
When you pick a venue for your binary options trading, it is important to find out exactly where and how it is regulated. If something goes wrong, you want to be able to report it to a strong and reputable financial authority that will open an investigation and protect your rights. The quality between different platforms and binary options companies vary greatly, especially when we look at companies that are not bound by strong trader protection laws. With such companies, you might not get clear custody information and order handling, and your funds might end up co-mingled with the company´s operational cash. Blocked withdrawals, bonus terms that trap funds, sloppy pricing feeds, and weak recourse if something goes wrong are common issues with poorly regulated binary options companies.
Many of the countries with exceptionally strong retail trader protection rules have banned or heavily restricted broker´s abilities to legally offer binary options to retail traders. This is for instance the case in the United Kingdom, Australia, and the European Union countries. If you are a retail trader in such a jurisdiction, the best course of action it to look for alternative derivatives that you can trade with a locally licensed broker. Depending on the jurisdiction, you might for instance be able to use vanilla options, mini futures contracts, or contracts for difference (CFDs) instead of binary options.
When financial authorities have studied retail binary options, they have found very high loss rates among retail clients. Typically, four out of five retail clients wipe out their account. In Australia, the securities regulator ASIC reviewed the market for 2017 and 2019, and found about 80% of retail clients lost money trading binaries. That number, combined with several other factors, including the fixed negative expected value at typical payout ratios, led ASIC to ban brokers from selling binary options to retail clients from May 2021.
Within the European Union, ESMA temporarily prohibited brokers from selling retail binary options in 2018, after several notable scandals, and data that showed consistent losses for consumers. ESMA also noted that the payoff structure produced negative expected returns in practice. National follow-ups documented why the math works against end-users as trade counts rise, and the temporary ESMA band was kept in place until the membership nations that regulated retail binary options at the respective national level. Today, all EU membership countries prohibit brokers from selling binary options to non-professional traders.
The United Kingdom was still a part of the EU back in 2018 and became one of the first membership countries to enact their own ban. When the UK left the EU, the ban was kept in place. The UK’s financial regulator FCA has issued repeated warnings to consumers in the UK, stating that a majority of retail clients lose money on binaries, and showed how the ability to beat the odds embedded in the pricing is required to come out ahead, conditions rarely met by casual users.
When financial supervisors ban or restrict a financial product, they typically do so only after measuring client outcomes and running cost–benefit tests, to ensure that the prohibitions are justified by measured loss rates, embedded negative expectancy, and evidence of misconduct around distribution. As a rule of thumb, if a product’s real-world data show that most retail users lose money most of the time and that misconduct proliferates around its sale, strict regulators will act.
High/Low Binary Options
The oldest and most popular type of binary option is the High/Low binary option. When you find information online about binary options, it is a good idea to investigate if the information is actually true for all kinds of binary options, or if the writer is only describing High/Low binary options but making it sound as if the High/Low dynamic is the only one.
This is how conventional High/Low binary options work: If you think the price of the underlying asset will be above the current price when the option expires, you buy a High binary option. If you think the price of the underlying asset will be below the current price when the option expires, you buy a Low binary option.
Example: EUR/USD is trading at 1.1000. You buy a High binary option with a 1-hour expiry, predicting the exchange-rate will be higher at expiry than it was at purchase. If at expiry the price is higher than 1.1000, you get a fixed payout (e.g. your stake back + 80% profit). If it’s not higher, you lose your entire stake.
High/Low binary options are also known as Over/Under binary options, Up/Down binary options, and Call/Put binary options. They are suitable for trending markets with a clear upward or downward direction, and some traders also use them for very short-term strategies such as momentum trading. Traders skilled at technical analysis are known to look for signs of support/resistance breakouts and then employ High/Low binary options to profit. News traders also frequently use High/Low binary options.
Other types of binary options
In addition to the ubiquitous High/Low binary options, you can find binary other types, which all come with their own structures and are suitable for different markets and objectives. Here are a few examples:
Touch / No-Touch Options
How it works: You predict whether the asset price will (Touch) or will not (No Touch) reach a predetermined price level at any time before the option has expired.
Example: Gold is at $2,000. A “Touch” option with a barrier at $2,020 pays out if gold touches or exceeds $2,020 before expiry.
Touch binary options are commonly used on highly volatile markets, while No Touch binary options can be used to profit from stagnant markets where trend-following strategies would not work well.
Range Options (In/Out Options)
How it works: You predict whether the price will stay within a defined range (In option) or move outside that range (Out option) during the option’s life.
Example: GBP/USD trades at 1.2500. The broker defines a range of 1.2450–1.2550. “In” pays if the price stays between these levels during the entire lifespan of the option. “Out” pays if it breaks above or below the range at any point during the entire lifespan of the option.
Range options are typically used on markets where the support/resistance zones are clear. In options are used to profit from periods of low volatility.
Ladder Options
How it works: A ladder option has multiple price levels (“rungs”). Each rung has a different payout depending on how far the price moves.
Example: EUR/USD are at 1.1000. Ladder levels are 1.1010, 1.1020, and 1.1030.
The higher the level you target, the higher the payout if reached. 1.1010 pays 20%. 1.1020 pays 50%. 1.1030 pays 100%. So, as long as the price rises to at least 1.1020, you get a payout.
In essence, a ladder option is built from several individual binary options. Ladder options are popular on strongly trending markets, and are typically used for momentum trading and trend continuation trading.
In a strict sense of the word, a ladder option is not binary, since more than one outcome is possible. In the example above, four outcomes are possible (lose entire stake, profit 20%, profit 50%, or profit 100%).
Pair Options (Asset vs. Asset)
How it works: You predict which one of two assets that will perform better over a certain time (relative performance).
Example: Will Apple stock outperform Microsoft stock by Friday at 4 pm?
Pair Options are often built on two assets that have correlated markets, e.g. two competing stock companies within the same sector, such as Coca-Cola (KO) vs. PepsiCo (PEP) or Nike (NKE) vs. Adidas (ADS.DE). Comparing national or regional stock indices that have historically high correlations is also popular, e.g. FTSE 100 (UK) vs. DAX (Germany) or Nikkei 225 (Japan) vs. Hang Seng (Hong Kong). On the commodity markets, we know of many strong inter-commodity relationships, e.g. due to substitution, production linkages, and/or shared demand drivers. Gold vs. Silver (both tend to react to inflation and USD movements) and Crude Oil WTI vs. Crude Oil Brent (highly correlated demand but can diverge significantly on supply issues) are two well-known examples.
How the contract works, from purchase to expiry
Every trade starts with choices, including the market you want to trade, the type of option you want to use, the strike or barrier level you need for your strategy, the size of your stake, and the expiry time.
You will know before you purchase the option exactly how much you will get paid if your prediction comes true. On many retail platforms, the return is shown as a payout percentage on the stake, for example 75% payout. (This means you risk $100 to receive $175 back if you finish in the money.) There are also platforms that price contracts between 0 and 100 and let you buy or sell that probability. A finish in the money settles at 100 and a finish out of the money settles at 0, so your profit or loss is the difference between your entry price and the settlement. Either way, you are dealing with an all-or-nothing payoff and a predetermined expiry time. You can not add a stop loss or take profit order the way you would with spot FX, futures, or listed options, though some exchange markets let you trade out before expiry by hitting the opposing side.
Expiry times
In theory, a binary option can be created with any lifespan, but in practical reality, retail binary options platforms tend to favor short-term and super short-term options, including options that expire just 30 seconds, 1 minute, or 5 minutes after purchase.
It is important to understand that very short expiries concentrate micro noise. Spreads widen at odd moments, small prints near the bell carry outsized weight, and tiny wobbles flip wins into losses with no room to manage the path. Longer expiries hand more control to drift, macro releases, and session flows that you cannot bend to your chart. Your method needs to live on the same time frame as your contract. If your signal forms on fifteen-minute structures, forcing it into sixty-second contracts is asking to donate. If your plan revolves around earnings or policy meetings, a brief expiry may end before the real move shows up, while a much longer clock exposes you to everything else that day.
Probability
The fair value of a binary contract is tied to the probability that the statement will be true at expiry. That probability depends on factors such as the distance between current price and the level you care about, the time left on the clock, the volatility of the underlying, and the effect of carry or interest rates in some markets. Far barriers with little time left are unlikely. Near barriers with calm volatility are more likely. Higher volatility lifts the chance of hitting faraway levels for out-of-the-money contracts and can reduce the chance for those already in the money as noise can knock you back inside. Around scheduled news, the implied probability can swing sharply even if the underlying has not moved yet, which is why payouts and prices often look worse for you immediately before events.
The payout rate and how the math is working against you
Because wins pay a fixed amount that is lower than the loss on a failure, the break-even win rate sits well above 50 percent.
Example: You purchase a $100 binary option where the payout is 80%. If you lose, you lose $100. If you profit, you profit $80. The platform always gets more money when you lose, than what they have to pay you when you win.
It helps to write the arithmetic cleanly. Let p be your win rate, P be the payout as a fraction of stake, and L be the loss fraction on a failure, which on most retail menus is 1.00. The expected value per trade is EV = p × P − (1 − p) × L. Set EV to zero to find the win rate you need just to tread water: p × P = (1 − p) × 1, so p(P + 1) = 1 and p = 1 ÷ (P + 1). If the posted payout is 0.80, then P + 1 = 1.80 and 1 ÷ 1.80 is 0.5555…, which is roughly 55.56 percent. If the payout is 0.72, the break-even win rate climbs to about 58.14 percent. That hurdle exists before you add frictions like late clicks, widened spreads near the bell, or platform fees. The cleanest way to think about the product is that you are trying to beat a house edge embedded in the payout table while working on a timer that does not let you adjust the exposure after entry.
Let´s look at another example, and how it plays out over time. Suppose a platform quotes a five-minute EURUSD up-contract at an 80 percent payout. You stake 10. If EURUSD settles even a tick above your strike at the five-minute mark, your account shows 18 back; if not, you receive 0 and the 10 is gone. Your break-even win rate is 55.56 percent. Run twenty such tickets with a true win rate of 12 wins and 8 losses. Total won is 12 × 8 = 96. Total lost is 8 × 10 = 80. Net over the set is 16, which sounds decent until you notice how quickly the result flips if your hit rate drops to 10 out of 20 or the average payout slides to 0.75 during busy moments.
Empirical data show most clients fail to sustain the required hit rates after costs and noise, so aggregate P&L skews negative. Binaries have negative expected returns for retail investors at the group level, which is what shows up once you measure results at scale rather than trade by trade.
Risk management under an all-or-nothing payoff
Once you have purchases a binary option, you cannot slide a stop or trim size. Risk controls are employed before the purchase, through techniques such as strict position sizing and choosing when not to trade.
Fixed-fraction sizing keeps drawdowns survivable when variance hits. One percent of equity per individual binary option is already aggressive for short expiries, and many careful users choose to put the cap at 0.5% of their total account balance while they learn. Daily and weekly loss caps reduce the chance that a rough patch escalates into a large hole.
The practical way to operate is to be very picky with your trading. Insist on clean entries aligned to your timeframe, and avoid scheduled chaos.
Escalation schemes that double stakes after a loss (e.g. Martingale) should not be used. Do the math, and you will understand why. With sub-100 percent payouts, even a “recovery” needs an overshoot to cover prior losses, and platform limits or your own balance are likely to get there first.
Of course, for most retail traders, the best course of action is to stay away from the binary options all together, and pick alternative financial instruments where it is possible to use stop-loss and take-profit orders, and where losses and profits are not all-or-nothing.
Logging and measuring whether you actually have an edge
The only honest way to know if your approach is viable is to keep a log and do the arithmetic. Record the date, asset, direction, strike, entry time, expiry time, stake, quoted payout percentage, and result, along with one sentence on why you clicked. At the end of the week compute your true win rate, your average payout, and the expected value per ticket using the same EV formula shown earlier. Work the numbers carefully so you do not fool yourself with a lucky streak or a bad patch. If the math says your average result per ticket is negative after a fair sample, reduce size and either change product or rethink timing rather than pushing harder against a baked-in hurdle.
Who uses binaries and why they stick around
People use binaries for two main reasons: the clarity of the maximum loss and the small stake needed to express a view over a short window. Short-term event traders like the clean line at expiry and the lack of slippage once the bet is on. Newer traders like the straightforward ticket and the idea that a small account can take many attempts. Those conveniences are real, but so are the trade-offs. The payout schedule loads the dice, the timer removes mid-trade control, and the venue often introduces operational risk you do not face on mainstream exchanges.
With that said, there are also many retail traders who use binary options simply because these platforms carry out very heavy marketing campaigns where they specifically target potential traders with no previous trading experience. The campaigns often put a strong emphasis on how easy the binary option is to understand, and how quickly you will find out if your prediction was right. Instead of properly evaluating all available trading solutions (e.g binary options vs. vanilla options vs. mini futures contracts), new traders jump on the opportunity to gain exposure to financial markets through binary options. There are also many platforms who deliberately target traders in countries where getting access to conventional trading can be difficult for an aspiring trader with a tiny budget.
As a retail trader, it is advisable to evaluate the different solutions available to you before you decide if binary options is the optimal way to go. If you want simple direction but with better control over exits, you can for instance look into CFDs, vanilla options, ETFs, and mini futures contracts.
Frauds
Regrettably, many fraudsters are using binary options as a lure to bring in victims, and harm to retail traders extends past the clean loss on a contract.
Around the world, financial authorities and the police has repeatedly flagged widespread fraud committed through binary options websites, including refusals to credit customer accounts or honor withdrawals, identity theft tied to KYC uploads, and rigged pricing feeds. In the United State, the Securities Exchange Commission (SEC) and its Investor.gov portal began cataloging these complaint categories years ago and continue to warn about them. The FBI reported a jump from a handful of IC3 complaints with ~$20,000 in losses in 2011 to hundreds of complaints with millions in reported losses by 2016, reflecting the boom in poorly regulated web-based platforms.
Supervisors also emphasize operational and custodial risk. Many binary options sites are based in offshore jurisdiction where they are allowed to hold client funds without proper segregation, and they can use opaque bonus terms that lock accounts until exorbitant trading requirements have been fulfilled.
Examples of alternatives to binary options
Many traders are attracted to binary options because they like being able to gain exposure to an underlying asset without actually having to buy and sell that asset. Binary options also make it easy to speculate on things such as indices; things that can´t really be bought and sold like a traditional asset.
With that said, there are many derivatives that you can use instead of binary options. If you live in a jurisdiction where retail binary options are not properly regulated, and where you can not use a locally licensed broker and receive strong trader protection, it is best to refrain from the binary options and pick another product. Exactly which products that are available to you under secure conditions depends on your jurisdiction. Below, we will take a look at a few examples.
Generally speaking, you want to look for products where:
- You can use a locally licensed broker and be protected by a forceful financial authority.
- Your account will be covered by a governmental trader and investor protection scheme, which will step in if the broker can not honor its obligations to you due to insolvency.
- You can use the full range of conventional risk management tools, including stop-loss and take-profit orders.
- The result is not all-or-nothing, and you actually get a bigger profit if the market moves more in your favor. (Binaries have a capped upside.)
- The minimum contract size is suitable for your account balance level and risk management strategy.
Fractional share trading means buying less than one full share of a company’s stock. Traditionally, you could only buy whole shares. This meant that if the stock price was $180, you needed at least $180 to buy one share. With fractional shares, you can buy a fraction (say, 0.1 or 0.05 of a share) for a smaller amount, for example, investing just $18 or $9 in a share where the full price is $180.
Not all brokers offer fractional share trading, so you need to be careful when you pick a broker if this is your plan. When a broker offers fractional shares, they typically aggregate trades from multiple investors and hold full shares on their books. You own a proportional claim on the share, and your gains (or losses) move in line with the stock’s price. The share will not be registered in your name and you do not get voting rights.
Fractional share trading requires less capital than full-sized share trading, and it is easier to stick to a sane risk management routine.
Vanilla options
A vanilla option is the most standard type of options contract. They give the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset (like a stock, ETF, or index) at a predetermined price (strike price) before or on a specific expiration date.
The price you pay when you buy a vanilla option is called the premium, and you can never lose more than this amount.
Most major brokers allow retail investors to trade vanilla options, but you might need a special derivatives account to get started, because options are more complex than stocks. When you apply for the derivatives account, your broker may assess things such as your trading experience, financial situation, and understanding of options. Examples of concepts that you need to understand are time decay and leverage risk. Engaging in complex strategies such as spreads and straddles requires additional skills.
Options inherently provide leverage, because buying an option gives you exposure to a number of shares for a fraction of the stock’s cost. You pay only the option premium instead of the full price of the stock.
A standard stock options contract is for 100 shares of the underlying stock, which can make it a big risk for traders. Some brokers therefore offer mini options, which are more accessible for small-scale traders. A typical mini stock option is for 10 shares of the underlying stock.
Mini futures contracts
A futures contract is an agreement where one party is obligated to buy the underlying asset and the other party is obligated to buy it, at a predetermined price, on a specific future date. Unlike an option, the future is binding for both parties.
Just like options contracts, futures contracts are available for various type of underlying assets, including commodities, stocks, and indices. Futures are inherently leveraged, and you will control a large notional value with a small amount of money. Examples of concepts you need to understand are leverage risk, expiration, rollovers, margin account, and margin call.
To accommodate retail traders, some brokers offer mini futures contracts. A mini futures contract is just a smaller version of a standard futures contract, usually 1/5 to 1/10 the size, designed to make trading more accessible. Standard futures require a large upfront margin, and mini contracts reduce the required margin by 5–10×, allowing smaller traders to participate. Mini contracts are generally very liquid, especially for major indices like the S&P 500, making it easy to enter and exit trades.
Contracts for Difference (CFDs)
A Contract for Difference (CFD) is a financial derivative that allows you to speculate on the price movement of an asset without actually owning the underlying asset. Typically, your CFD broker/platform is also your counterpart in the trade.
The contract is binding for both parties, and you agree to exchange the difference in the asset’s price between the time you open the position and when you close it.
If you think the market is going up, you buy (go long). If you think the market is going down, you sell (go short).
Example: You open a CFD to “buy” 100 shares of Company X at $50. If the price rises to $60, the broker pays you the $10 difference per share. If the price drops to $40, you pay the broker $10 per share.
CFDs are available for a wide range of underlying assets and products, including stocks, indices, commodities, forex, and cryptocurrency. The capital requirement is small, and leverage can be used to open a large position with a small initial outlay.
Examples of concepts you need to understand are leverage risk, overnight fees, and counterparty risk (no clearinghouse when your broker is also your counterpart).
Note: Retail CFD trading is not permitted under U.S. regulation.
Exchange-traded funds (ETFs)
An ETF is similar to a mutual fund, but the shares are listed on an exchange and traded in a fashion similar to stocks. This means they can be used for short-term speculation.
ETF trading is accessible for small-scale retail traders since it is possible to buy only 1 share. Some brokers even offer fractional shares, meaning you could risk as little as a few dollar on each trade. There are many popular ETFs to chose from that are very liquid, which means you can buy and sell quickly during trading hours.
Spot fx trading
Retail traders can trade spot FX (foreign exchange) on a small scale, and it’s actually quite accessible. Spot FX trading is the buying and selling of currencies at the current market exchange rate, with settlement typically happening “on the spot” (T+2 days for most currency pairs). If you stick to major fx pairs, you can enjoy the very high liquidity.
Many retail brokers are offering Micro Accounts where you can make a small deposit and start trading mini, micro, and nano lots. A standard fx lot is 100,00 units of the base currency, but a mini lot is just 10,000 units, a micro lot is 1,000 units, and a nano lot is 100 units.
Leverage is usually available, but not obligatory/built in.