All or nothing options
Binary options are a type of option where you try to predict
the short-term movements of a share price, currency, index or
commodity. They are relatively new in Australia and are a
speculative, high risk product.
Here we explain what binary options are and the risks you need
to know about before you consider trading them.
What are binary options?
Binary options are also called 'all-or-nothing options', 'fixed
return options' or 'digital options'. The payoff is either a fixed
amount or nothing at all.
With a binary option, you are trying to predict whether the
price of an asset, a commodity or index, will be trading above or
below a specified price at a specified time in the future. For
example, will the share price of a company be trading above its
current price in one hour?
You can buy binary options on major market indices, foreign
exchange rates, commodities and share prices. You can choose the
expiry date, however, contract times are usually very short, from a
few minutes or hours to a few months in the future.
Binary options may appear to be simple but picking the
short-term movements of a share price, currency, index or commodity
is extremely difficult, even for professionals.
Binary options are a high risk speculative investment which,
unless you are following a market carefully, are really just a bet
or gamble on an asset price movement.
Binary option payouts
Unlike other types of options, a binary option does not give the
option holder the right to purchase or sell the underlying
When a binary option reaches its expiry, the holder receives a
fixed cash payout if they have picked the price movement correctly.
This is usually a percentage of the cost of the binary option
If you don't choose the price movement correctly, you lose your
entire investment (what you paid for the option).
Types of binary options
Binary options can be based on various products including
shares, forex (foreign exchange), economic events, commodities or
There are two main types of binary options available, which
- Once touch binaries - The underlying market or
asset price will or won't touch, or reach, a specific level at some
time at or before expiry
- Digital binaries - The underlying market will
or won't finish higher or lower than a specific level at
There are unlimited variations of these two types of binaries,
including combinations with plain vanilla options. Many structured
products contain binary type rules where the interest on a deposit
pays for the binary for an event to occur or not to occur. For
example, the price of XYZ share will remain between $10 and
$20 for 3 months, or the price of XYZ share will not remain
between $10 and $20 for 3 months.
While binary options seem simple, picking short-term price
movements of markets or asset prices is extremely difficult.
Before you consider investing in binary options, it is very
important that you understand how the type of binary option you are
using works and how it is priced. You'll also need to be
comfortable with the fact that you are risking all of the money you
Buying and selling binary
Most binary option providers operate through online platforms.
Make sure the binary option provider has an Australian
Financial Services Licence (AFSL) or is authorised by an
Australian Financial Services Licensee, regulated by ASIC. To see
if a company holds an AFSL, search ASIC's Professional
Binary options are a financial product based on the underlying
market or asset price moving in a certain way before the binary
option expires. If the statement proves true, the binary option
will settle at 100. If the statement proves false, the binary
option will settle at 0.
Binary options are quoted as a two-way buy/sell price. If you
agree with the binary statement you buy the binary option in
anticipation of it settling at 100. If you disagree with the binary
option statement you sell the binary, expecting it to settle at
Until expiry, the binary option price will move between 0 and
100 depending on how likely the outcome is.
Once you acquire a binary option, there are no further decisions
for you to make as to whether or not to exercise the binary option
because binary options exercise automatically.
Binary options may promise to make you money quickly, but
you could also lose your entire initial investment. They are
very high risk and are not suitable for most investors. Seek
professional financial advice before you invest to
make sure they are right for you.
Don't send documents to unlicensed providers
Binary options traders must have an Australian Financial
Services Licence (AFSL). If you are setting up an account, make
sure you are dealing with a licensed operator before you hand over
copies of your personal identification documents, such as a
driver's licence. Check operators are licensed on ASIC's
Case study: Richard invests in binary options
Richard saw an online video advertising binary
options, that claimed he could make an 80% profit in just a few
Richard visited the company's website and saw that they offered
binary options on the shares of some large, well-known companies.
As Richard had a share portfolio and actively followed the
share market, he thought he'd give it a go.
Richard paid $400 for a binary option contract that expired in
an hour. He placed a 'call' option with a payoff of 70%, or $280,
if the share price was trading above the current price of $1.50 at
the expiry time. An hour later the share price was trading
at $1.48. Richard did not pick the price movement correctly
and lost his $400, the cost of the contract.
He decided binary options were too risky for him and that he'd
be better off focusing on his share portfolio.
Risks of binary options
Binary options are speculative, high risk products, where you
can easily lose your entire investment. Once you buy a binary
option contract you may not able to re-sell it before the expiry
Binary options often offer payouts that appear quite high, for
example 50% to 80% of the money you invest, if you pick the correct
price movement. However, if the price does not move in the
direction you chose, you'll lose 100% of your investment.
You need to understand the implied probability (the true odds of
an event occurring) from the binary price. The midpoint between the
buy/sell prices is a good indicator of the expected probability of
the binary settling at 100. A binary price of 10/14 indicates that
the market expects there is only about a 12% probability of the
binary settling at 100.
There may also be a risk that the binary options provider won't
be able to fulfil its obligations to you if something goes wrong
(counterparty risk). For example, if the provider became insolvent,
you may be ranked as an unsecured creditor and have difficulty
getting your money back.
Binary options are a high risk, unpredictable investment option.
Before you invest, seek professional financial advice to make sure
they are suitable for you.
Last updated: 22 Jan 2016