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An option with a fixed all-or-nothing payout: if the underlying finishes past the strike at expiration, the holder receives a fixed amount (typically $100); otherwise nothing. Also called digital options.
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Key takeawayTight credit spreads approximate a binary payout profile. Understanding binaries helps you see why very narrow spreads behave more like bets than like hedges.
💡 Why It Matters
Binary options pay a fixed amount if the underlying is past the strike at expiry, or nothing. They're the simplest option payoff to understand and reveal why tight credit spreads approximate binary risk — a $1-wide spread is nearly a binary bet.
⚙ How It Works
If underlying > strike at expiration: pay $100 (standard). If underlying ≤ strike: pay $0. No intermediate values. Delta is extremely high near the strike at expiration because a $0.01 move flips the payoff between $0 and $100. Also called digital options.
📋 Example
Binary call on SPY at $580. SPY closes at $580.01: you receive $100. SPY closes at $579.99: you receive $0. The entire $100 hinges on one penny. This is why tight credit spreads behave like binaries — a $1-wide spread with $0.40 credit has a $0.60 loss or $0.40 profit, with little in between.
⚠ Common Mistakes
Trading binary options on unregulated platforms. Legitimate exchange-listed binaries (NADEX) have transparent pricing. Offshore binary options platforms are frequently fraudulent — they control the settlement price. Only trade binaries on regulated exchanges.
❓ FAQ
What is Binary Option?
An option with a fixed all-or-nothing payout: if the underlying finishes past the strike at expiration, the holder receives a fixed amount (typically $100); otherwise nothing. Also called digital options.
Why does Binary Option matter for premium sellers?
Tight credit spreads approximate a binary payout profile. Understanding binaries helps you see why very narrow spreads behave more like bets than like hedges.
How does Binary Option work?
If underlying > strike at expiration: pay $100 (standard). If underlying ≤ strike: pay $0. No intermediate values. Delta is extremely high near the strike at expiration because a $0.01 move flips the payoff between $0 and $100. Also called digital options.
What are common mistakes with Binary Option?
Trading binary options on unregulated platforms. Legitimate exchange-listed binaries (NADEX) have transparent pricing. Offshore binary options platforms are frequently fraudulent — they control the settlement price. Only trade binaries on regulated exchanges.
Related Terms
Asian Option
An exotic option whose payoff depends on the average price of the underlying over a specified period, not just the price at expiration.
Barrier Option
An exotic option that activates (knock-in) or deactivates (knock-out) when the underlying price hits a preset barrier level.
Basket Option
A basket option has a payoff determined by the weighted average price of multiple underlying assets rather than a single asset.
Bermuda Option
A Bermuda option can be exercised only on specific dates between the purchase date and expiration, not continuously like an American option or only at expira...
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