Binary options are simple trading instruments which generally pay either a high, fixed return or nothing at all. Here is the "binary". There can be only two possible outcomes to a trade: win or lose. For these reasons binary (or digital) options are also often referred to as "all-or-nothing" options. And this is mostly an accurate description of the situation but does not quite tell the whole story. But first a little more on this relatively little-known financial instrument.
Binary options, like traditional options, are available on a variety of underlying assets. With stocks, indices, commodities and currencies being the most popular assets on which to base trades. However, unlike traditional options binaries pay out a fixed, known return which is not dependent at all on how far "in-the-money" the option is. If the asset you placed a call option order on is higher than the strike price by so much as one pip / tick then you are paid out the same high returns as if it finished in the money by 100 points.
Lets look at a short example shall we?
Keeping it simple we'll use the S & P 500 in our example. Lets assume we are bullish on this index overall, and specifically over the next week (although it could be month, day, hour, or even less in some cases). We open a binary call option on the S & P500 for $ 1000, expiring in one week, and offering a return of 78%. Fast forward a week and the S & P, after both ups and downs, finishes just 1 point above the price we bought it at a week ago. Well, in this case we would be paid out $ 1,780 on this successful trade.
But what if we had been wrong? Well in that case we would be returned nothing in most instances. However, as hinted at earlier this is not always the case. A few select binary options brokers actually offer significant returns, up to 15%, on losing trades. A structure like this can be far better for those new to binary options trading or the more risk averse than the standard structure where nothing is returned on losing trades.
The most popular broker offering this structure of returns is Anyoption. Anyoption offers a flat 15% return on all losing trades and returns from 61-71% on winning trades. There is a trade-off involved. You sacrifice some potential returns on winning trades in exchange for that security of a 15% return on your losing trades. For the more risk tolerant or experienced binary options trader it may not be the best choice but for the beginner or more risk averse choosing a broker who offers some returns on losing trades may be something to consider.