A binary option, we also say digital option is a financial derivative that derives from options, is one of our exotic options and belongs to the category of futures.
In our view, binary options can only have two scenarios: If a previously defined event occurs, the buyer receives a fixed amount, otherwise the option expires worthless. Underlyings - like classic warrants - include indices, equities, currency pairs or even commodities. It can then be speculated on falling or rising courses.
As with traditional warrants, there are binary buy and sell options in American and European varieties.
The cash-or-nothing option pays out a predetermined amount at maturity, whereas the asset-or-nothing option pays or pays the price of the underlying. In contrast to American options, the trader thus has no opportunity to exercise the option during the term.
For American options, the event must occur during the term; For European options, the event must occur at maturity.
Relation to the classic warrants
Since a binary European knock-in-call or put option is paid out when it is listed in the money during or at the end of the term, its normalized price is equal to - that is the price of a payout unit - the probability of this event. Thus, their price behaves just like the delta of a classic warrant.
The binary options trading
Binary options have long been traded over the counter, ie directly from the issuer to the buyer. There was no liquid market for trading for this form of exotic options. Typically, such an option can not be liquidated during the term unless the broker or platform allows such action.