Binary Output
Binary Option, also known as Digital Option with its digital payout, 1 (Win) or 0 (Lose).
Last updated
Binary Option, also known as Digital Option with its digital payout, 1 (Win) or 0 (Lose).
Last updated
A binary option is a common form of option product in traditional finance, where the parties involved in the transaction are assigned one of two outcomes based on whether the option expires in the money.
There are regulated binary option trading venues in traditional finance including Nadex which offers binary options in forex, stock indices, and commodity markets.
Binary options depend on the outcome of a "yes or no" proposition, hence the name is "binary." Traders receive a payout if the binary option expires in the money and incur a loss if it expires out of the money.
For example, in the case of a binary call option, if the price of the underlying asset at expiry is higher than the strike price, binary call option buyers (=participants in "Over" in stVol) will make a profit.
Conversely, binary put option buyers (=participants in "Under" in stVol) will make a profit if the price of the underlying asset at expiry is lower than the strike price.
This is different from the linear changes in profit of plain vanilla options, as depicted below.
Compared to plain vanilla call and put options,
Binary options with ATM strike price (= higher chance to become ITM) can provide as high leverage as plain vanilla options with deep OTM strike (= lower chance to become ITM).
As the time to expiry gets shorter, the distance between the strike and the then spot becomes more important in determining the expected payout of the option.
From a degen's point of view, trading an option with an ATM strike could be more comfortable than trading an option with a deep OTM strike, especially for the options with shorter expiry.
Binary options in stVol have an expiry date and/or time. At the time of expiry, the underlying asset's price must be on the correct side of the strike price (based on the trade taken) for the trader to make a profit.
A binary option automatically exercises when the option expires, meaning the buyer will either receive a payout or lose their entire investment in the trade - there is nothing in between.
A binary option may be as simple as whether the price of BTC at 2 p.m. will be above the price of BTC at 1 p.m. (both on 4 May 2024, UTC).
In the above example, the trader places an order on either Over (price moves to higher than the strike) or Under (lower than the strike), depending on his view on the price movement in the next hours.
