# Binary Options

> Binary options pay a fixed amount if a condition is met and nothing if not. Learn how they are priced, how they relate to prediction markets and the scams to avoid.

Source: https://learn.tradelabsai.com/options/binary-options/  
Track: Options · Level: Advanced · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Binary Options", https://learn.tradelabsai.com/options/binary-options/

A binary option, also called a digital option, pays a fixed amount if a condition is true at expiration and nothing if it is false. A typical example pays $100 if a stock closes above $50 on Friday and $0 otherwise. Unlike a standard option, the payoff does not grow with the size of the move; it is all or nothing. Binary options exist as legitimate instruments on regulated exchanges and inside bank structured products, but the term is also tied to a long history of offshore fraud, so it is important to know the difference.

## Types of binary options

| Type | Pays if |
|---|---|
| Cash or nothing call | Underlying is above the strike at expiry |
| Cash or nothing put | Underlying is below the strike at expiry |
| Asset or nothing | Pays the underlying's value instead of cash if in the money |
| One touch | Underlying touches a level at any time before expiry |
| No touch | Underlying never touches a level before expiry |
| Range (double no touch) | Underlying stays between two levels |

One touch and no touch options are barrier style binaries, popular in FX markets. See [Barrier Options](https://learn.tradelabsai.com/options/barrier-options/).

## Pricing

Under Black Scholes assumptions, a cash or nothing call paying $1 is worth:

```
binary call = e^(-rT) × N(d2)
```

N(d2) is the risk neutral probability that the option finishes in the money, so the binary's price is essentially the discounted probability of the event. See [Black-Scholes Model](https://learn.tradelabsai.com/options/black-scholes-model/).

**Example: Pricing a binary call**
A stock trades at $100. A binary call paying $100 if the stock is above $105 in 30 days, with 25% volatility and a 5% rate, has d2 ≈ minus 0.66, so N(d2) ≈ 0.25. The price is about $100 × 0.996 × 0.25 ≈ $25. If you buy it, you pay $25 to win $100 with roughly a 25% chance; your expected value is close to zero unless your probability estimate is better than the market's. See [Expected Value](https://learn.tradelabsai.com/math/expected-value/).

## Binary options and prediction markets

Prediction market contracts work like binary options: a share pays $1 if an event happens and $0 if not, and its price reflects the probability. Polymarket's crypto up or down markets are effectively short dated binary options on whether a coin finishes above its starting price. See [What Are Prediction Markets?](https://learn.tradelabsai.com/prediction-markets/what-are-prediction-markets/) and [Up or Down Markets Explained](https://learn.tradelabsai.com/prediction-markets/up-or-down-markets-explained/).

In the United States, regulated venues such as Nadex (now Crypto.com | Derivatives North America) and CME list binary style event contracts under CFTC oversight.

## Hedging and the strike problem

Binary options are hard to hedge near expiry. With little time left and the price near the strike, the value can jump between almost $0 and almost the full payout on a tiny move, so delta and gamma become extreme. Dealers often approximate binaries with tight call spreads to manage this risk, which means binaries are effectively priced using the skew of nearby vanilla options. See [Gamma](https://learn.tradelabsai.com/options/gamma/) and [Volatility Smile and Skew](https://learn.tradelabsai.com/volatility/volatility-smile-and-skew/).

## The binary options scam problem

In the 2010s, many unregulated offshore websites offered "binary options" to retail customers. Regulators found widespread fraud:

- Platforms that manipulated prices or refused withdrawals.
- Payouts structured so that customers lost on average, even before manipulation.
- Aggressive sales tactics and fake testimonials.

The European Securities and Markets Authority banned the marketing, distribution and sale of binary options to retail clients across the EU in 2018, and other regulators issued similar bans or warnings. The SEC and CFTC have published investor alerts about binary options fraud. See [Identifying Trading Scams](https://learn.tradelabsai.com/start-here/identifying-trading-scams/).

**Watch out: How to tell legitimate from fraudulent**
Legitimate binary contracts trade on regulated exchanges with transparent prices and independent settlement. Be very wary of any website offering binary options with high "returns", bonuses, or account managers who call you, especially if it is not registered with your country's regulator.

## Common mistakes

- **Ignoring the payout structure:** many retail platforms paid 70% to 85% on a win but took 100% on a loss, which loses money at a 50% win rate.
- **Trading very short expiries** that are close to random.
- **Using unregulated platforms.**

## Frequently asked questions

### What is a binary option?

An option that pays a fixed amount if a condition is met at expiry, such as the price being above a strike, and nothing otherwise.

### Are binary options legal?

It depends on the country and venue. They are banned for retail clients in the EU and restricted elsewhere, while some regulated US exchanges list binary style contracts.

### How are binary options priced?

Their price is close to the discounted probability of the event happening; under Black Scholes, a $1 binary call is worth e^(minus rT) × N(d2).

Next, learn average price options in [Asian Options](https://learn.tradelabsai.com/options/asian-options/).

## Sources

- SEC and CFTC, [Investor alert: binary options and fraud](https://www.sec.gov/investor/alerts/ia_binary.pdf)
- Wikipedia, [Binary option](https://en.wikipedia.org/wiki/Binary_option)

## Continue learning

- Next lesson: [Asian Options](https://learn.tradelabsai.com/options/asian-options/)
- Previous lesson: [Barrier Options](https://learn.tradelabsai.com/options/barrier-options/)
- Related: [Barrier Options](https://learn.tradelabsai.com/options/barrier-options/): Barrier options switch on or off if the underlying touches a set level. Learn knock in and knock out types, in out parity, pricing, uses and hedging challenges.
- Related: [Up or Down Markets Explained](https://learn.tradelabsai.com/prediction-markets/up-or-down-markets-explained/): Polymarket's up or down markets ask whether a coin finishes a short window above its start price. Learn the round lengths, settlement sources, pricing and risks.
- Related: [What Are Prediction Markets?](https://learn.tradelabsai.com/prediction-markets/what-are-prediction-markets/): Prediction markets let you trade shares that pay $1 if an event happens. Learn how prices become probabilities, how they settle, the risks and how to start.
- Related: [Identifying Trading Scams](https://learn.tradelabsai.com/start-here/identifying-trading-scams/): The most common trading scams, from fake platforms and pump and dumps to signal groups and recovery scams, with warning signs and steps to protect yourself.
- Related: [Black-Scholes Model](https://learn.tradelabsai.com/options/black-scholes-model/): The Black Scholes model prices European options from five inputs. Learn the formula, its assumptions, a step by step example and where the model breaks down.
- Related: [Gamma](https://learn.tradelabsai.com/options/gamma/): Gamma measures how much an option's delta changes for a $1 move in the underlying. Learn why gamma peaks at the money near expiry and how it drives risk.