In finance, a binary option is a name given to a type of option where the payoff is either some fixed amount of some asset or nothing at all. There are two main types of binary options and these are:
-
the cash-or-nothing binary option and
-
the asset-or-nothing binary option.
The Cash-or-Nothing Binary Option: In The cash-or-nothing binary option if the option expires in-the-money then some fixed amount of cash is paid.
The Asset-or-Nothing Binary Option: The value of the underlying security is paid by the asset-or-nothing binary option.
Thus, due to the reason that there are only two possible outcomes so the options are binary in nature. They are also referred to as all-or-nothing options, digital options (these are more common in forex/interest rate markets), and Fixed Return Options (FROs) (on the American Stock Exchange).
