What is Binary Options Trading and How Does it Work?

Written by Steven Hatzakis
Edited by John Bringans
Fact-checked by Joey Shadeck

December 11, 2024

Binary options are financial instruments that only have two possibilities – profit or loss. Either you win, or you lose; there’s no in-between. Binary options have a short shelf-life, offer little control over potential outcomes, and feature odds that make them more like gambling than investing (the expression “flipping a coin” applies here).

Simply put, binary options are dangerous investments. I’ve created this guide to shine more light on these financial instruments and provide some historical context to help you decide whether these risky investments are right for you.

What are binary options?

A binary options contract is a type of derivative financial instrument. Upon expiration (all binary options contracts have an expiration date/time), the contract will result in one of two outcomes, leading to either a profit or a loss.

Binary options have fewer controls for risk management than standard options contracts, making binary options far more speculative (and much more like gambling).

For instance, with a traditional options contract, the value is marked-to-market throughout the trading day, allowing you to potentially exit a position early with either a profit or loss. On the other hand, if your binary options contract expires on the wrong side of the strike price, you’ll end up losing your money. There is no possibility of exiting early to preserve your funds.

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Are binary options legal?

The legality of binary options will depend on several factors, including your country of residence and the regulatory jurisdiction that governs your broker. Many of the world’s most stringent, highly regarded regulatory jurisdictions consider binary options to be highly risky investment products with a tendency to be associated with fraudulent firms. A number of these regulatory institutions have either placed restrictions on the sale of binary options, or banned them outright.

Binary options according to Tier-1 regulatory jurisdictions

The ForexBrokers.com Trust Score database tracks over 100 regulatory jurisdictions and ranks them in a 5-tier system. Tier-1 is reserved for the strictest, most reputable regulatory jurisdictions in the world. Take a look at how some of the most stringent global regulatory jurisdictions view binary options.

In the United States

The Securities and Exchange Commission (SEC) describes binary options as “all-or-nothing options," and has distributed warnings in conjunction with Investor.gov (not to be confused with our sister site, investor.com) about binary options fraud.

The Commodity Futures Trading Commission (CFTC) maintains that “many online binary option trading platforms operate in violation of the law,” and that “many times these platforms are operated by offshore companies that are committing fraud.” Check out this video from the CFTC that demonstrates an example of a binary options broker scam.

Check out my guide to the best regulated brokers in the U.S.

In the U.K.

The Financial Conduct Authority (FCA) has permanently banned the sale of binary options to retail traders, expressing, “concerns about the inherent risks of these products, and the poor conduct of the firms selling them.” In Europe, the European Securities and Markets Authority (ESMA) has introduced measures that explicitly prohibit the “marketing, distribution or sale of binary options to retail investors.”

See my guide to the best brokers in the U.K.

In Australia

A 2019 survey conducted by the Australian Securities & Investment Commission (ASIC) found that a whopping 80% of binary options traders lost their money. ASIC has since banned binary options until 2031.

Click here to see my picks for the best brokers in Australia.

In Canada

The Canadian Securities Administrators (CSA) has made it illegal to “advertise, offer, sell or otherwise trade binary options shorter than 30 days with any individual.”

Trying to find a regulated broker in Canada? See my guide to the best brokers in Canada.

In New Zealand

The Financial Markets Authority (FMA) has cautioned that, “binary options are very high risk, even for experienced investors.”

Click here to find my list of the best regulated brokers in New Zealand.

Why are binary options risky?

Binary options are highly risky financial products. Unfortunately, the simplicity of binary options tends to attract novice investors and beginner traders. Here are some of the reasons that binary options present so much risk to investors and traders of all experience levels.

All binary options expire worthless

Binary options are a type of options contract for an underlying asset with a ticking time-decay that approaches a zero-value. Just like any options contract, these will expire as “worthless” when the time runs out (if not exercised).

What is perhaps the primary difference between a traditional option and a binary option?

Reveal answer

With binary options, there is no possibility of exiting early to preserve your funds. If your binary options contract expires on the wrong side of the strike price, you’ll end up losing your money. However, with a traditional option, you may exit early before it expires to either lock in a profit or minimize your loss.

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Binary options are like a coin flip

Traditional options update in value as the underlying price updates relative to the strike price (allowing you to exit early with a smaller profit or loss). For binary options, the payout is solely based on whether the market price is above or below the strike price at expiration. This is where the “coin flip” analogy is relevant.

Hidden costs

One of the biggest problems with binary options is the obfuscation of trading costs. Many of the unregulated (or lightly regulated) brokers that offer binary options build egregious spreads into their pricing. These hidden costs makes it far more difficult for clients to make money, even if their options contracts happen to expire profitably.

Pricing variance

Traditional exchange-traded options use the Black-Scholes Model. In a nutshell, this long-standing pricing model presents a method for tracking the skew of volatility across different strike prices by factoring a handful of variables tied to the price of an option. Conversely, brokers offering off-exchange binary options do not account for the skew (including across non-standard strike prices), which puts investors at a disadvantage. Today, there exists more transparency for the trading costs of exchange-traded binary options, but they are still short-lived investments attached to an “all-or-nothing” risk factor.

Risk management

Binary options provide less control over the risk management process than you would have with traditional options, such as American or European-style options contracts. Though the lack of complexity associated with binary options (compared to traditional options products) can make them appealing to investors, the lack of risk management tools makes binary options more akin to gambling than to investing.

How do binary options work?

Binary options feature two potential outcomes: a profit, or a total loss. These derivative financial products allow you to speculate on the market without owning any underlying assets (similar to contracts for difference, or CFDs).

Contract prices vary, but in the U.S. contracts are always between $0 and $100. Binary options traders can speculate on a variety of markets, such as forex, commodities, and stocks.

Example of a binary options contract trade

Binary options are similar to event contracts, in which investors speculate on whether a given event will occur.

For example, you might believe that the EUR/USD will trade above 1.0760 by the end of the trading day (1.0760 would be considered the “strike price”). In this case, you might buy a binary options contract that lists the EUR/USD as trading above 1.0760 by a predetermined time (for this example, let’s say midnight).

The EUR/USD rising above 1.0760 by midnight is the event you are betting on. If the clock ticks over to midnight and the EUR/USD is trading above 1.0760, you’ll net a small profit. If it’s trading below 1.0760, you’ll lose your entire initial investment.

Types of binary options

Not all binary options contracts operate the same. Here is some common terminology used to describe the various types of binary options that exist on the market today:

High/Lows

These are call or put options that allow investors to speculate on the rise or fall of an asset relative to the strike price upon expiration.

One-touch/No-touch

These contracts allow investors to speculate on whether a price will be touched within a pre-determined time frame.

Range or Boundary

These contracts allow investors to speculate whether a price will remain within a specific range or boundary before expiration.

Knock-outs

A contract with a knock-out price mimics a stop-loss order. In this case, the contract will close out a trade at a predetermined loss if the price of the option contract moves against you.

Event-driven

These contracts are purely boolean. This is a “yes or no” bet for whether an asset will close above or below the contract’s price within a specified time frame.

Regulated forex brokers that offer binary options

I do not recommend trading binary options. That said, if you feel strongly about trying out this risky investment product, I recommend that you do so with a highly regulated broker. The only brokers I would ever recommend that offer binary options provide such products through a national exchange with proper regulation in place.

In the EU, for example, IG offers binaries in the form of Turbo warrants (also known as “turbos”) through its regulated Multilateral Trading Facility. Check out my IG review to learn about the wide range of investment products available with this broker.

In the U.S., Interactive Brokers offers zero-dated options (0DTE). These exchange-traded options expire on the same day you trade them, allowing investors to speculate on same-day events. Interactive Brokers’ EventTrader platform also allows you to speculate on whether an asset will close above or below a certain price by the end of the day. Read my review of Interactive Brokers to learn more about additional investment products available with this broker.

Note: These highly rated brokers offer a variety of other financial products and instruments, such as forex, CFDs, crypto, stocks, and commodities (availability depends on the broker and your country of residence).

ForexBrokers.com 2024 Overall Rankings

Now that you've learned more about binary options (and why I don't recommend them), check out my overall list of the best forex brokers in the industry. These brokers offer a wide range of financial products and instruments. I've evaluated over 60 forex brokers, using a testing methodology that's based on 100+ data-driven variables and thousands of data points. Check out our full-length, in-depth forex broker reviews.

Company	Overall Rating	Offering of Investments	Commissions & Fees	Platform & Tools	Research	Education	Mobile Trading	Trust Score
IG								99
Interactive Brokers								99
Saxo								99
CMC Markets								99
FOREX.com								99
Charles Schwab								99
City Index								99
XTB								96
eToro								93
Capital.com								87
Swissquote								99
AvaTrade								94
Plus500								99
FXCM								95
OANDA								93
Pepperstone								95
XM Group								88
Admirals								93
FP Markets								87
Tickmill								86
IC Markets								84
FxPro								90
Markets.com								93
FinecoBank								94
BlackBull Markets								78
Vantage								90
ThinkMarkets								92
HYCM (Henyep Capital Markets)								86
HFM								86
DooPrime								83
Questrade								86
ActivTrades								81
Trading 212								79
BDSwiss								76
Trade Nation								85
TMGM								83
Eightcap								85
Moneta Markets								72
Spreadex								71
MultiBank								84
Exness								81
ACY Securities								75
easyMarkets								80
RoboForex								73
VT Markets								70
Octa								70
IronFX								83
IFC Markets								73
Trade360								76
Axi								82
TeleTrade								71
iFOREX								75
FXOpen								76
FXPrimus								71
Xtrade								74
Forex4you								61
GBE brokers								71
Alpari								68
TopFX								67
Libertex (Forex Club)								73
LegacyFX								67
FXGT.com								69
ATFX								85

Avoiding Forex & Crypto Scams

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• How to Avoid Forex Trading Scams in 2024
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About the Editorial Team

Steven Hatzakis is the Global Director of Online Broker Research for ForexBrokers.com. Steven previously served as an Editor for Finance Magnates, where he authored over 1,000 published articles about the online finance industry. A forex industry expert and an active fintech and crypto researcher, Steven advises blockchain companies at the board level and holds a Series III license in the U.S. as a Commodity Trading Advisor (CTA).

John Bringans is the Managing Editor at ForexBrokers.com. An experienced media professional, John has a decade of editorial experience with a background that includes key leadership roles at global newsroom outlets. He holds a Bachelor’s Degree in English Literature from San Francisco State University, and conducts research on forex and the financial services industry while assisting in the production of content.

Joey Shadeck is a Content Strategist and Research Analyst for ForexBrokers.com. He holds dual degrees in Finance and Marketing from Oakland University, and has been an active trader and investor for close to ten years. An industry veteran, Joey obtains and verifies data, conducts research, and analyzes and validates our content.