Binary trading
Family VII · Market & styles
Not to be confused with binary option.
Binary trading covers contracts whose settlement value is one of two fixed amounts, determined by whether an underlying price, rate or event satisfies a condition at a set time. The stake and the potential payout are agreed when the contract is opened, and the position cannot be closed for a partial value in most venues. Because the payoff is discontinuous, pricing depends mainly on the probability of the condition being met rather than on the size of any move.
Payoff structure
A binary contract has a fixed stake and a fixed payout. If the condition is satisfied at expiry, the holder receives the payout; if it is not, the stake is lost. There is no intermediate settlement, so the outcome is all or nothing.
This differs from a forward or futures position, where profit or loss varies continuously with the underlying price. It also differs from an ordinary option, which can be sold before expiry for its remaining time value.
Worked example
A trader buys a binary contract on an index with a stake of 100 and a payout of 180 if the index closes above 5,000 at expiry. The maximum loss is the stake and the maximum gain is the payout minus the stake.
Had the index closed at 4,980, the condition would not be met and the net result would be −100, the full stake.
Pricing and regulation
The fair price of a binary contract is approximately the probability of the condition being met, discounted for the time to expiry, plus any spread or fee charged by the venue. Because the payout is fixed, the price is bounded between zero and the payout.
Rules on binary trading vary by jurisdiction. Some regulators treat certain binary contracts as financial instruments and permit them under licence; others prohibit the sale of binary options to retail clients or restrict them to professional investors. The legal status, permitted venues and investor protections therefore differ by country and should be checked against the relevant regulator.
Often confused with
- binary option
- A binary option is one specific type of binary contract, usually listed on an exchange or offered by a regulated venue with standardised expiry and payout terms, whereas binary trading is the broader activity of trading any two-outcome contract, including bespoke or off-exchange agreements; the visible sign is whether the contract carries a standardised exchange specification or is written bilaterally.