A binary option pays a fixed amount or nothing. These type of options, are also referred to as all-or-nothing options, since it is a type of option where the payoff is all or nothing. The return is therefore fixed and it comes to no surprise that such options are also known as: FRO’s-Fixed Return Options, Digital Options is another common term.

Trading on binary option platforms can be done with little to no knowledge of the stock market. An investor will only need to choose whether the price of some asset (underlying asset) will be higher (in the case of a call option) or lower (in the case of a put option) at the option’s expiration. Binary options are offered for a time period of 60 minutes or less.

The main difference between a regular vanilla option (traditional stock trading) and a digital option is largely based on how much the contract can potentially lose or gain. Digital options (binary options) are often referred to as FRO fixed rate options since the contract will have predetermined percentage of fixed rate of return.

Traditional vanilla options are much riskier since the potential gains can have no ‘ceiling’.  Regular options options have a payoff that is based on the price of the underlying asset. This can vary dramatically in return on your investment. But with a binary option you only need to consider the direction of the asset price (up or down) in a specific measurement of time (minutes, days, weeks, etc.). The important difference here is that you don’t have to take magnitude into consideration.

With binary options trading the payoff is fixed and pre-determined so therefore the potential risk and reward is known from the outset. Whereas with traditional options there are no outlined parameters so the possible loss or gain is not known (and can be dramatic).

The option will settle the contract regardless of how much the asset price is ‘in the money’ at expiration. Therefore even if the contract is only successful by one tick the contract still pays out at the fixed level.

Binary options allow you to focus on the most stimulating aspects of trading, the challenge and fun of forecasting market direction, rather than on the acquiring more risky ability to estimate the market trends. (Remember, any investment carries risks. Seek the proper advice before investing money).