Binary option - Definition and Overview

A binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. Thus the options are binary in nature because there is only two possible outcomes. They are also called all or nothing options or digital options.

For example, suppose I buy a binary option on XYZ Corp's stock struck at $100 with a binary payoff of $1000. Then if at the future maturity date, the stock is trading at or above $100, I receive $1000. If it stock is trading below $100, I receive nothing.

In the popular Black-Scholes model, the value of a digital option can be expressed in terms of the cumulative normal distribution function.

Example Usage of Binary