Your Practice. Popular Courses. Trading Skills Trading Instruments. What Is a Binary Option? Key Takeaways Binary options depend on the outcome of a "yes or no" proposition. Traders receive a payout if the binary option expires in the money and incur a loss if it expires out of the money. Binary options set a fixed payout and loss amount. Binary options don't allow traders to take a position in the underlying security.

Most binary options trading occurs outside the United States. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. Advertiser Disclosure ×. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms. Zero Days to Expiration 0DTE Options and How They Work Zero days to expiration options, or 0DTE options for short, are option contracts that expire and become void within a day.

Currency Option: Definition, Types, Features and When to Exercise A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a particular period of time. For this right, a premium is paid to the broker, which will vary depending on the number of contracts purchased. Put to Seller Put to seller is when a put option is exercised, and the put writer becomes responsible for receiving the underlying shares at the strike price to the long.

Position Trader: A trader who uses the unique opportunities that options offer to profit from factors such as time decay and volatility. Position Trading: The style of trading used by position traders, who are usually very experienced traders, to take advantage of the opportunities for profit that are created by the mechanics of options trading.

Read more about Position Trading. Premium: A term that can be used to describe the whole price of an option or the extrinsic value of an option. Read more about Premium. Pricing Model: A mathematical formula that is used to value or price an option contract based on specific factors. See Black Scholes Pricing Model or Binomial Pricing Model for examples. Pricer: A specific type of chain that displays the five main Greeks in addition to other standard information. Protective Call: A strategy that is used to protect profits in a short stock position.

Learn how to use a Protective Call. Protective Put: A strategy that is used to protect profits in a long stock position. Learn how to use a Protective Put. Put: A type of option which grants the holder the right, but not the obligation, to sell the relevant underlying security at an agreed strike price. Read more about Put Options. Put Call Parity: A concept related to pricing that's based on avoiding arbitrage by ensuring the extrinsic values of related calls and when puts are equal, or close to equal in value.

Put Ratio Backspread: An advanced strategy that can be used for profit in a volatile market, when there's a bearish outlook. Learn how to use a Put Ratio Backspread. Put Ratio Spread: This is an advanced strategy that can be used to profit from an underlying security remaining neutral. Learn how to use a Put Ratio Spread. Quadruple Witching: The third Friday in the months of March, June, September, and December are the days when stock options, index options, stock futures, and index futures all reach their expiration point; this usually leads to high trading volume and increased volatility.

Quarterly Option: A type of option that uses a quarterly expiration cycle. Ratio Spread: A type of spread that is created using multiple contracts of differing amounts. This typically involves writing a higher amount of options than is being bought, but the ratio can be either way around.

Read more about Ratio Spreads. Realize a Profit: The process of taking profits when closing an existing a position. Profit that exists in an open position is unrealized profit. Realize a Loss: The process of incurring losses when closing an existing position.

Losses that exist in an open position are unrealized losses. Resistance Level: A price point, higher than its current price, that a financial instrument has not risen above over a given period of time. Return On Investment: Often abbreviated to ROI, this is the percentage of profit that's made, or could be made, on an investment.

Reverse Iron Albatross Spread: An advanced strategy that can be used to make returns from a volatile market. Learn how to use a Reverse Iron Albatross Spread. Reverse Iron Butterfly Spread: An advanced strategy that can be used to make returns from a volatile market. Learn how to use a Reverse Iron Butterfly Spread. Reverse Iron Condor Spread: An advanced strategy that can be used to make returns from a volatile market. Learn how to use a Reverse Iron Condor Spread. Rho Value: One of the Greeks, the rho value measures the theoretical effect of changes in interest rates on the price of the option.

Also referred to as Options Rho. Risk Graph: A graph used to illustrate the risk to reward ratio of a position. Read more about Risk Graphs. Risk Reversal: A simple strategy that's typically used for the purposes of hedging. Read more about Risk Reversal. Risk to Reward Ratio: An indication of how much risk is involved in a position in relation to the potential rewards or profits.

Read more about Risk to Reward Ratio. Rolling Down: The process of closing an existing position and opening a comparable position at the same time, but with a lower strike price. Rolling Forward: The process of closing an existing position and opening a comparable position at the same time, but extending the time left until expiry. Rolling: A trading technique used to close an existing position and open a similar one at the same time, with slightly different terms.

Read more about Rolling. Rolling Up: The process of closing an existing position and opening a comparable position at the same time, but with a higher strike price. Sell To Close Order: An order that's placed when you want to close an existing long position through selling the contracts you have previously bought.

Read more about the Sell to Close Order. Sell To Open Order: An order that's placed when you want to open a new position through writing new contracts. Read more about the Sell to Open Order. Settlement: The process by which the terms of a contract are resolved when the option is exercised. Read more about Settlement. Short Albatross Spread: An advanced strategy that can be used when the market is volatile. Learn how to use a Short Condor Spread.

Short Bear Ratio Spread: This is an advanced strategy that can be used when the outlook on an underlying security is bearish. Learn how to use a Short Bear Ratio Spread. Short Bull Ratio Spread: This is an advanced strategy that can be used when the outlook on an underlying security is bullish. Learn how to use a Short Bull Ratio Spread. Short Butterfly Spread: An advanced strategy that can be used when the market is volatile.

Learn how to use a Short Butterfly Spread. Short Calendar Straddle: An advanced strategy that can be used to profit from volatile market conditions. Learn how to use a Short Calendar Straddle. Short Calendar Strangle: An advanced strategy that can be used to profit from volatile market conditions. Learn how to use a Short Calendar Strangle. Short Call: This is a simple strategy that can be used when the outlook on an underlying security is bearish.

Learn how to use a Short Call. Short Call Calendar Spread: An advanced strategy that can be used to profit from volatile market conditions. Learn how to use a Short Call Calendar Spread. Short Condor Spread: An advanced strategy that can be used when the market is volatile. Short Gut: This is a simple strategy that can be used to profit from an underlying security remaining neutral. Learn how to use a Short Gut. Short Position: The position of being short on a financial instrument.

If you write contracts then you hold a short position on them. Short Put: This is a simple strategy that can be used when the outlook on an underlying security is bullish. Learn how to use a Short Put. Short Put Calendar Spread: An advanced strategy that can be used to profit from volatile market conditions. Learn how to use a Short Put Calendar Spread.

Short Selling: The selling of a financial instrument that isn't currently owned, with the expectation of buying it back in the future at a lower price.

Short Straddle: This is a simple strategy that can be used to profit from an underlying security remaining neutral. Learn how to use a Short Straddle. Short Strangle: This is a simple strategy that can be used to profit from an underlying security remaining neutral.

Learn how to use a Short Strangle. Read more about the Types of Options Spreads. Spread Order: A type of order that's used to create a spread by simultaneously transacting all the required trades. Stock Option: A type of option where the underlying security is stock in a publically listed company.

Stock Repair Strategy: A strategy that's used to recover losses from held stock that has fallen in value. Read more about Stock Repair Strategy. Stock Replacement Strategy: A strategy that involves buying deep in the money call options instead of the underlying stock. The strategy is used to reduce the capital required to enter the position.

Read more about Stock Replacement Strategy. Stop Order: A type of order that's used to automatically close a position when a specified price is reached. Strap Straddle: This is a simple strategy that can be used when price of the underlying security is volatile, but the inclination occurs when the move will be to the upside. Learn how to use a Strap Straddle. Strap Strangle: This is a simple strategy that can be used when the price of the underlying security is volatile, but the inclination occurs when the move will be to the upside.

Learn how to use a Strap Strangle. Strike Arbitrage: An advanced strategy that involves the use of arbitrage. Read more about the strike arbitrage at Arbitrage Strategies.

Strike Price: The price specified in a contract at which the holder of the contract can exercise their option. The strike price of a call is the price at which the holder can buy the underlying security and the strike price of a put is the price at which the holder can sell the underlying security.

Strip Straddle: This is a simple strategy that can be used when the price of the underlying security is volatile, but the inclination occurs when the move will be to the downside. Learn how to use a Strip Straddle. Strip Strangle: This is a simple strategy that can be used when the price of the underlying security is volatile, but the inclination occurs when the move will be to the downside. Learn how to use a Strip Strangle. Support Level: A price point, lower than its current price, that a financial instrument hasn't fallen below over a given period of time.

Swing Trader: A trader who looks for relatively short term price swings and aims to profit from those swings by trading accordingly. Swing Trading: The style of trading used by swing traders, where positions are usually held for a relatively short period of time in order to profit from short term price swings.

Read more about Swing Trading. Synthetic Long Call: A synthetic position which is essentially the same as owning calls. It involves buying puts and buying the related underlying security. Synthetic Long Put: A synthetic position which is essentially the same as owning puts. It involves buying calls and short selling the related underlying security. Synthetic Long Stock: A synthetic position which is essentially the same as owning stocks.

It involves buying at the money calls and writing at the money puts on the relevant stock. Synthetic Position: A position that's created using a combination of stocks and options, or a combination of different positions, to emulate another stock position or option position. Read more about Synthetic Positions. Synthetic Short Call: A synthetic position which is essentially the same as being short on call options.

It involves short selling stock and then writing put options based on that stock. Synthetic Short Put: A synthetic position which is essentially the same as being short on put options. It involves buying a stock and then writing call options based on that stock.

Synthetic Short Straddle: A synthetic strategy that essentially replicates the Short Straddle trading strategy. Read more about the synthetic short straddle at Synthetic Strategies. Synthetic Short Stock: A synthetic position which is essentially same as being short on stock. It involves the writing of at the money call options and buying at the money put options on the relevant stock.

Synthetic Straddle: A synthetic strategy that essentially replicates the Long Straddle trading strategy. Read more about the synthetic straddle at Synthetic Strategies. Technical Analysis: A style of analysis used to predict the future price movements of a financial instrument by studying historical data relating to the volume and price.

This typically involves analyzing charts and graphs to find patterns and trends. Theoretical Value: The value of a specific option, or position, that is calculated by a pricing model or other mathematical formulas. Theta Value: One of the Greeks, the theta value measures the theoretical rate of time decay of that option.

Also referred to as Options Theta. Time Decay: The process by which the extrinsic value diminishes as the expiration date of the option gets closer. Read more about Time Decay. Trading Plan: A detailed plan that a trader would prepare to lay out how they'll approach their trading.

The plan would usually include defined objectives, details of methods that will be used for budget control, risk management, and which strategies will be used. Trailing Stop Order: A type of order that includes a stop price which is based on a percentage or absolute change from the previous best price. Trading Levels: A level that's assigned to account holders at brokers to indicate what level of risk they can be exposed to.

Also known as approval levels. Read more about Trading Levels. Trend: A recognizable and continued movement in a market or in the price of a specific financial instrument. Underlying Security: The asset, security, or financial instrument that an option is based on. Vega Value: One of the Greeks, the vega value measures the theoretical effect of changes in the implied volatility of the underlying security on the price of the option.

Also referred to as Options Vega. Vertical Spread: A type of spread that's created using multiple contracts with different strike prices, but it has the same expiration dates. Read more about Vertical Spreads. Volatile Market: A market that's constantly moving unexpectedly and dramatically, with a high level of price instability. List Of Volatile Strategies. Volatility: A measure of how a financial instrument is expected to fluctuate over a specified period of time. Read more about Volatility.

Volatility Skew: When a graph that represents the implied volatility across options with the same underlying security, but different strike prices form a curve skewed to right. Volatility Smile: When a graph that represents the implied volatility across options has the same underlying security but different strike prices, forms a concave similar in appearance to a smile.

Volume: The amount of transactions that took place involving a specified financial instrument such as a particular option. One with a high volume means it has been heavily traded.

Writing an Option: The process of effectively creating new contracts to sell. Home Glossary of Terms History of Options Trading Introduction to Options Trading Definition of a Contract What is Options Trading? Options Trading Glossary of Terms The basic fundamentals of options trading are relatively easy to learn, but this is a very complex subject once you get into the more advanced aspects.

Recommended Options Brokers. Inflation, unemployment rates and interest rates are the examples of macroeconomic signals. Financial factors are characteristics of banking sector.

GMT stands for Greenwich Mean Time and it is a time zone that is used in many countries including European and African countries. An option about which a traders assumes that an underlying asset would expire at a price which is higher than target price.

An index comprises different stocks. Value of an index reflects the prices of securities underlying. This term describes a binary option which is profitable for a trader.

A call option will be in the money, if the price of underlying asset at expiry time is greater than its strike price. An option in which a trader assumes that an underlying asset would expire at a price lower than target price. Moving Averages. These are indicators that traders use to see moving averages of underlying assets price movements. This term is used to describe a binary option which is not profitable for a trader.

A put option will be called out of the money when the price of asset at expiry time is more than the strike price of it. Pip stands for Price Interest Point. It measures the change in exchange rate for a currency pair or some other underlying asset. It is a kind of binary option for which traders forecast if the price of underlying asset would end within a specified range of price or it would end out of it. It is also known as boundary option. It is the amount of money that is refunded to an investor when an option is expired at the money.

It is the amount that is returned to an investor when an option is expired in the money. Example: Mr. This is a kind of trading in which investors have a chance to invest in binary options without any risk. But if result is according to the wish of the trader, he will keep all profit that results from the risk free trade. The term stock refers to shares of a company listed on a stock exchange. It is the price of an underlying asset at the time when a binary option is exercised. This is a method in which previous market data is used to identify trends and to anticipate the future prices of underlying assets.

In this method signals such as trading volume and price are charted to check the future probabilities. Minimum downward or upward movement in the price of a security.

Trading with binary options, as you probably know, requires you to be a real pro in all of the terms and basic rules of this activity. For this purpose it is strongly recommended that you become aware of those words with important meaning which you will encounter during your trading activity.

Be aware that most binary options brokers provide some glossary packs too, but in most cases this pack of terms is usually quite limited.

After all, proper and gradual learning is the most optimal course. Besides, by studying the glossary step by step, it will be easier for you remember the most significant words from the binary options glossary! Asset The asset is the underlying tool or instrument that is chosen for binary options trading contract determinations.

Assets can include stocks, indices, commodities and the different currency pairs you trade with. With this term, we talk about the instant in time, in which the targeted value of a binary option becomes the same as the price of the underlying asset selected by the trader.

The current price is the value the amount that is determined in almost real time and it is the opposition of the most price information that is in many cases delayed by a particular period of time — about 15 minutes.

Usually known as expiry time, with this term we point to the date or the time, when the value of the underlying asset will be compared to the strike price in order to form the final outcome or your payoff. At the expiry time time of expiration the binary option you traded then becomes void and ceases to be traded. If a binary option is in the money, then it has value upon the expiry time. The strike price, in a few words, is determined by the underlying security price at the very moment when the binary option is purchased and the contract is made.

Once the binary option reaches its expiry time, the underlying security price must be compared to the strike price in order to see if the binary option has won, or lost its value, or in other words whether it is in the money or out of the money. The payout is the value of money that you as a trader receives as a profit from binary options trading activity as to a particular binary trade.

This is a kind of a tool that is applied by the traders in order to make the prediction about the underlying asset value — and to be more specific, whether this value will expire during or out of the set of ranges — simpler and quicker.

Even though a little bit more specific, the following terms from our glossary are also important to be learnt, known and applied during your binary options trading activity. We divide our specially tailored glossary in two parts in order to simplify it for you, and to offer you a quick pause during your learning process.

This is where the market that is usually referring to a financial or stock market , prices are almost in all cases in a downward trend. This is where the market that is usually referring to a financial or stock market prices are almost in all cases in an upward trend. Commodities are the types of assets that you can purchase a binary option to trade in. In general, the commodity is a physical object and it can be a precious metal — gold, silver and etc — as well as a manufacturing resource like cotton or even petrol.

The price of each of the commodities we have chosen and the rest of them is determined according to many economic factors and changes. Currency is another asset that you can trade with. The currency price is the other name of the market price term. This is the present value of the underlying asset and it is always announced in real time — i.

with no delays by the financial information provider. The deposit is the amount of money you invest with a binary options broker, when you complete a registration and create an account. This is the total value you put into the brokerage e-wallet of yours to make trades with. The early closure is the moment when the traders receive the possibility to close a binary option which then, instantly causes it to expire, ceasing the contract. With the glossary term index binary we describe the binary option which has underlying an asset that is measured to an index.

Such binaries can be understood by these examples: Dow Jones, FTSE and etc. When you purchase binary option to trade it, you pay a particular value and this is the investment amount. Popular in trading experience in general, this glossary term refers to the entire or a part of amount of your investment you have returned to you in a situation when the binary option expires at the money. The return amount is the amount that you earn right after the purchased binary option expires in the money.

The return value ranges according to the instrument you have traded with your binary. The particular asset you have chosen, as well as the broker type you are trading on, also affect for the return value. Since the return value is always pre-determined, you know in advance the eventual loss or profit you will get from the purchased binary. A type of asset, this is the financial share of a company — for instance Microsoft, Samsung, Twitter — and etc which you trade with.

When you reach a moment that you have earned a fair sum of money from your binary options trading activity, then, you will want to have this money withdrawn from your brokerage account and deposited in your your debit card or bank account. To receive this money, you will have to make a withdrawal. Note that the withdrawal methods and terms and conditions are different between brokers, and depend on the broker you are trading in with binaries.

With charting you practice plotting a binary option value at some very beneficial moment of time. Charting in general is a tool and it is a way of trading with binaries. The main purpose of charting is to be helpful with technical analysis. This is the analysis — and the usage of it — when you want to undertake research in advance and to find out additional data points in order to make your prediction of the prices and the market movements of the assets you have chosen more optimal and profitable.

Feel free to start your learning course with our helpful and very useful binary options trading glossary now! We are sure that it will be very supportive to your overall education in the field, so do not lose any more time and start learning right away! Good luck! Binary Options Glossary. At the money With this term, we talk about the instant in time, in which the targeted value of a binary option becomes the same as the price of the underlying asset selected by the trader. Current price The current price is the value the amount that is determined in almost real time and it is the opposition of the most price information that is in many cases delayed by a particular period of time — about 15 minutes.

Time of expiration Usually known as expiry time, with this term we point to the date or the time, when the value of the underlying asset will be compared to the strike price in order to form the final outcome or your payoff. In the money If a binary option is in the money, then it has value upon the expiry time.

Payout The payout is the value of money that you as a trader receives as a profit from binary options trading activity as to a particular binary trade.

Boundary instrument This is a kind of a tool that is applied by the traders in order to make the prediction about the underlying asset value — and to be more specific, whether this value will expire during or out of the set of ranges — simpler and quicker.

Glossary Terms for Advanced — Learn the Following, too! Bear market This is where the market that is usually referring to a financial or stock market , prices are almost in all cases in a downward trend. Bull market This is where the market that is usually referring to a financial or stock market prices are almost in all cases in an upward trend. Commodities Commodities are the types of assets that you can purchase a binary option to trade in. Currency Currency is another asset that you can trade with.

Currency Price The currency price is the other name of the market price term. Deposit The deposit is the amount of money you invest with a binary options broker, when you complete a registration and create an account.

Early closure The early closure is the moment when the traders receive the possibility to close a binary option which then, instantly causes it to expire, ceasing the contract. Index binary With the glossary term index binary we describe the binary option which has underlying an asset that is measured to an index.

Investment amount When you purchase binary option to trade it, you pay a particular value and this is the investment amount. Refund Popular in trading experience in general, this glossary term refers to the entire or a part of amount of your investment you have returned to you in a situation when the binary option expires at the money. Return The return amount is the amount that you earn right after the purchased binary option expires in the money.

Stock A type of asset, this is the financial share of a company — for instance Microsoft, Samsung, Twitter — and etc which you trade with. Withdrawal When you reach a moment that you have earned a fair sum of money from your binary options trading activity, then, you will want to have this money withdrawn from your brokerage account and deposited in your your debit card or bank account.

Charting With charting you practice plotting a binary option value at some very beneficial moment of time. Dev Ops.

The return value ranges according to the instrument you have traded with your binary. Bull Spread: A spread that is created to profit from bullish movements. Call Ratio Backspread: An advanced strategy that can be used for profit in a volatile market, when there is a bullish outlook. Listed Option: A type of option that is listed on an exchange, with fixed strike prices and expiration dates. Read more about Look Back Options.

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