Binary Option

A binary option, also called a digital option, is an option with only two possible outcomes in terms of the profit: if the option expires in the money, the option holder receives a certain sum (or asset), called the notional, otherwise the holder receives nothing.

Binary options are usually european, however sometimes american binary options, so called one-touch options, are traded.

Binary option value graph is similar to the delta graph of a vanilla option, similarly, the delta graph of a binary option looks similar to the gamma graph of a regular option.

A binary option can be roughly simulated with a portfolio of two vanilla options with very close strike prices. In this example we use a portfolio of 1000 long calls struck at 9.999 and 1000 short calls struck at 10.000 to emulate a binary call with the notional of 1 (1000 * 10.000 - 1000 * 9.999) and strike 10.

Want to learn more? Download now an interactive reference application for iPhone.

The screenshot shows the following portfolio:

This is an excerpt from iOptioneer option trading reference application. In order to build the real-time dynamic strategy graph and run simulations you will need to download the application from App Store.