<p>A <strong>binary option</strong> is a type of <a href="/NewSite/encyclopedia/derivative/" class="ency-link">derivative</a> contract that offers a fixed payout if a specific condition is met at expiration, and nothing otherwise. Also known as an all‑or‑nothing option, it pays out a predetermined amount—typically cash or an asset—when the underlying price finishes above (call) or below (put) a strike price at the agreed time. Because the payoff is either the full amount or zero, binary options are simple to understand but carry a high risk of losing the entire premium.</p>

<h2>How It Works</h2>
<p>When a trader purchases a binary option, they choose:</p>
<ul>
<li><strong>Underlying asset</strong> – a stock, commodity, currency pair, or index.</li>
<li><strong>Direction</strong> – call (expecting price to rise) or put (expecting price to fall).</li>
<li><strong>Strike price</strong> – the level the underlying must be above (call) or below (put) at expiration.</li>
<li><strong>Expiration time</strong> – ranging from minutes to months.</li>
<li><strong>Payout</strong> – a fixed percentage of the invested amount, often 70‑90 % if the condition is satisfied.</li>
</ul>
<p>At expiration, the option is automatically settled. If the condition is true, the trader receives the fixed payout; if false, they lose the premium paid. No intermediate values exist; the outcome is binary.</p>

<h2>Why It Matters</h2>
<p>Binary options attract retail investors seeking short‑term, high‑reward trades with a known maximum loss—the premium. Their simplicity makes them accessible to beginners, but the all‑or‑nothing structure can encourage overtrading and significant losses if not managed carefully. Regulators in many jurisdictions have restricted or banned retail binary option trading due to concerns about fraud and inadequate investor protection.</p>
<p>For example, a trader buys a $100 binary call on EUR/USD with a strike of 1.1000 expiring in one hour and a 80 % payout. If EUR/USD is at 1.1005 after the hour, the trader receives $180 ($100 stake + $80 profit). If the rate is 1.0995 or lower, the trader loses the full $100. This clear risk‑reward profile illustrates why understanding the mechanics and risks is essential before using binary options in a trading strategy.</p>