Binary Options Trading
A binary option is a two-way option. Either something happens or it doesn't. You
can choose (place a wager on) either of two outcomes. Either you win or lose .
Here's how a binary option, often called an 'all-or-nothing' option, works: It's a
'yes or no' proposition. For example, look at a typical call option, the SPX Oct
1100 call. If the binary version of this option is ITM when expiration arrives
(remember that's Friday morning settlement), the option owner collects $100. If it
is OTM, the option is worthless. That's it. It does not matter how far ITM. The
payoff is zero when OTM and $100 when ITM. You get $100 whether SPX is
1100 or 1200 or 1500.
On the CBOE, there is a market in the options, with bids and offers. If you buy or
sell one of these calls (or puts) at $50, you are getting even money on your
'investment.' The options trade with a premium between $0.01 to $0.99, and can
never be worth more than $1.00.
CBOE offers Binary Options on the S&P 500 Index (SPX) and the CBOE
Volatility Index (VIX). The ticker symbols for these Binary contracts are BSZ and
BVZ respectively. Expiration dates and settlement values are the same as for
In the example, it's a wager: Will SPX be at or above 1100 at expiration? You
can trade either puts or calls, so there is no concern about margin requirements
when selling options. If you want to sell the call, buy the put instead.
Example: You believe SPX will be below 1100 when the settlement price is
determined on Friday. You can sell the 1100 call and collect a cash premium.
Or you can buy the 1100 put and pay a cash premium. Assuming these are
priced efficiently, one trade is equivalent to the other. If you are correct and sold
the call, it will be worth nothing and you keep your premium. If you bought the
put, it will be worth $100. The profit should be the same, regardless of which
option you traded.
Be aware. If the closing price is 1100.00, the cal