option trading us

A binary option is a financial option in which the payoff is either some fixed monetary amount or nothing at all.^[1][2] The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options(FROs) (on the American Stock Exchange).^[3]

While binary options theoretically play a role in asset pricing, they are prone to fraud and banned by regulators in many jurisdictions as a form of gambling.^[4] Many binary option outlets have been exposed as fraudulent.^[5] The U.S. FBI is investigating binary option scams throughout the world, and the Israeli police has tied the industry to criminal syndicates.^[6][7][8] The FBI estimates that the scammers steal US$10 billion annually worldwide.^[9] The use of the names of famous and respectable people such as Richard Bransonto encourage people to buy fake "investments" is frequent and increasing.^[10] Articles published in the Times of Israel newspaper explain the fraud in detail, using the experience of former insiders such as a job-seeker recruited by a fake binary options broker, who was told to "leave [his] conscience at the door".^[11][12] Following the articles published by the Times of Israel, Israel's cabinet approved a ban on sale of binary options in June 2017,^[13] and a law banning the products was approved by the Knesset in October 2017.^[14][15]

Function[edit]

Binary options "are based on a simple 'yes' or 'no' proposition: Will an underlying asset be above a certain price at a certain time?"^[17] Trades place wagers as to whether that will or will not happen. If a customer believes the price of a commodity or currency will be above a certain price at a set time, he buys the binary option. If he believes it will be below that price, he sells the option. The price of a binary is always under $100.^[17]

Investopedia described the binary options trading process in the U.S. thusly:

[A] binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then you will pay $44.50, if you decide to sell right then you'll sell at $42.50.

Let's assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100 - $44.50 = $55.50 (less fees). This is called being "in the money."

But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This is called being "out of the money."

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss (compared to letting it expire out of the money).^[17]

Every option settles at $100 or $0, $100 if the bet is correct, 0 if it is not.^[17]