Binary options depend on the outcome of a "yes or no" proposition, hence the name "binary. At the time of expiry, the price of the underlying asset 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 exercisesmeaning the gain or loss on the trade is automatically credited or debited to the trader's account when the option expires.
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That means the buyer of a binary option will either receive a payout or lose their entire investment in the trade--there is nothing in between. Conversely, the seller of the option will either retain the buyer's premium, or be required to make the full payout. 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.
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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. The trader makes a decision, either yes it will be higher or no it will be lower. Binary Options vs.
A European option is the same, except traders can only exercise that right on the expiration date. Vanilla options, or just optionsprovide the buyer with potential ownership of the underlying asset.
When buying these options, traders have fixed risk, but profits vary depending professional trader binary options how far the price of the underlying asset moves. Binary options differ in professional trader binary options they don't provide the possibility of taking a position in the underlying asset. Binary options typically specify a fixed maximum payout, while the maximum risk is limited to the amount invested in the option.
Movement in the underlying asset doesn't impact the payout received or loss incurred. The profit or loss depends on whether the price of the underlying is on the correct side of the strike price.
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Some binary options can be closed before expiration, although this typically reduces the payout received if the option is in the money. Therefore, investors should be wary of the potential for fraud.
Conversely, vanilla options trade on regulated U. If the trader wanted to make a more significant investment, they could change the number of options traded.
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Non-Nadex binary options are similar, except they typically aren't regulated in the U. Article Sources Investopedia requires writers to use primary sources to support their work.
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You can learn more about the professional trader binary options we follow in producing accurate, unbiased content in our editorial policy. Securities and Exchange Commission. Accessed Oct. Compare Accounts.