Binary options are a type of financial security that operates on a fixed payoff and expiration deadline. The investor places a trade on a prediction of whether or not the specified price of an asset will go up or down by a predetermined time in the future. Binary options are unique in this way because the investor knows the risk and reward even before placing a trade.
Two main forms of these binary options exist. The first is the cash-or-nothing option. Where the investor receives a fixed cash payment if the option closes in-the-money. The second type is an asset-or-nothing option, where the investor is paid the cost of the base security. Asset-or-nothing binary options are also referred to as the fixed return option (FROs), digital options, or all-or-nothing options.