What is a binary option?
A binary option is a contract whose settlement depends on a yes-or-no proposition evaluated at an agreed time. A basic example asks whether the price of an underlying asset will be above a stated level at expiration. The holder ordinarily receives the predetermined positive settlement for a correct outcome or loses the contract stake for an incorrect outcome. Purchasing this contract is not the same as owning the underlying stock, currency pair or cryptocurrency.
The specified condition is evaluated at expiration.
The stake represents the amount at risk for the illustrated contract.
The profitable outcome follows the agreed payout, not the size of the market move.
The Investor.gov definition describes binary options as an outcome-based product whose payoff generally takes the form of a fixed amount or zero. Contract variations should be checked separately.
The five fields that control the settlement
| Field | Definition | What to inspect |
|---|---|---|
| Underlying asset | The reference price or other economic indicator. | The source of the quote; you do not necessarily acquire the asset. |
| Strike or reference level | The boundary used in the yes-or-no test. | The exact contracted comparison, including equality. |
| Direction | Whether the proposition is above or below that level. | Choose based on the contract wording, not chart color. |
| Expiration | The instant used to resolve the proposition. | Confirm clock time, time zone and any entry cutoff. |
| Stake and offered return | Amount at risk and payout for a successful result. | Separate the returned stake from net profit. |
Some retail interfaces combine the reference level with the price when a trade opens. Others show a distinct strike. Read the precise contract terms rather than assuming every online platform resolves trades identically.
From ticket to expiration: one illustrative workflow
- Define the proposition
Imagine a statement such as “the underlying price will be higher than the contracted reference at 14:00.”
- Review the stake
A hypothetical $10 stake is entirely at risk in the standard all-or-nothing model.
- Review the quote and return
The interface gives an offered payout rate that can depend on the product and conditions.
- Confirm before the cutoff
A short entry window may close earlier than the contract expiration itself.
- Check settlement
At the specified expiry, the contractual reference price determines whether the condition was met.
These are educational steps, not a recommendation to place a trade. At Binarium, our separate terminal guide identifies entry and expiration controls from the operator’s published instructions.
Payout, gross return and net profit are three numbers
Suppose a contract risks $10 and advertises an 80% profitable-outcome rate. A successful outcome produces $8 in net profit, with the original $10 also returned. Total credited to the account is $18. For a failed outcome the illustrative net result is a loss of $10, assuming no special refund provision.
| Outcome | Gross credited amount | Net balance change |
|---|---|---|
| Win | Stake $10 + profit $8 = $18 | +$8 |
| Loss | No credit in standard model | −$10 |
| One win and one loss | $18 once, then a separate $10 loss | −$2 across two independent $10 stakes |
A common wording error is to call $18 “profit”. It is actually gross return including principal. The distinction is crucial for comparing advertising claims and for building any trading-risk model.
Reading the settlement statement, not just the quoted percentage
Suppose the ticket shows a $25 stake and an 80% net winning payout. A standard win adds $20 to the account and returns a total of $45 including the original stake; a full-stake loss removes $25. If one win and one loss occur at unchanged terms, the pair produces −$5 net, not a flat outcome. This arithmetic remains illustrative until the exact ticket and settlement rules are known.
The three figures to separate are the stake at risk, the net profit on a win, and the gross amount credited at settlement. An app may visually present these values in different places; comparing just the large payout number across products can conceal the actual loss-to-gain asymmetry.
The payout percentage shifts the break-even requirement
For a simplified contract with stake 1, profit on success equal to r and a total loss on failure, expected change is E = p × r − (1 − p), where p denotes the hypothetical success probability. Setting E to zero gives p = 1 / (1 + r). At an 80% payout rate, r = 0.8 and the break-even fraction is about 55.56%.
| Assumed payout rate | Arithmetic break-even success fraction |
|---|---|
| 70% | 58.82% |
| 80% | 55.56% |
| 90% | 52.63% |
These are mathematical thresholds under simplified assumptions, not estimates of how frequently someone will win. Platform expenses, fees or different outcomes can shift the requirement. At a 50% win rate and 80% payout, the model loses an average of $1 for each $10 contract.
A fixed payout does not mean a fixed positive return
The monetary result is predetermined conditional on the outcome; the outcome itself is uncertain. A directional view can fail by a very small price difference just as it can by a large difference. An apparent trend or several previous winning outcomes does not establish that the next binary condition is more likely to be met.
Price noise at expiration
A small price movement near the contracted instant can flip the settled result.
Short duration
A very short interval may leave little time to reassess assumptions after opening.
Payout asymmetry
The loss of a whole stake may exceed the profit from a successful stake of identical size.
That is why the product requires a different mental model from simply buying an asset and waiting for its value to change.
Chart timeframe, entry cutoff and expiry are different
A candle timeframe tells you how chart data are grouped: a one-minute candle displays information accumulated during a one-minute interval. The entry cutoff establishes when a new contract can still be opened. Expiration is the contractual time when the outcome is fixed. The three may occur at different moments.
Candle timeframe
A display preference affecting chart granularity.
Entry cutoff
Deadline for submitting the contract.
Expiration
Contractual settlement time; the decisive price reference is assessed here.
Neither a green candle nor a temporary move in the intended direction guarantees a winning result at expiry. For an example of how a specific terminal displays those controls, read our Binarium terminal guide.
Loss streaks and drawdown in a sequence of trades
Consider a starting balance of $100 with fixed $5 stakes. If three consecutive contracts fail, the balance moves through $95 and $90 to $85. The resulting drawdown against the starting balance is 15%. Recovering from $85 to $100 now requires a gain of approximately 17.65% of the remaining balance, not merely 15%.
| Assumed step | Balance |
|---|---|
| Before trading | $100 |
| First loss | $95 |
| Second loss | $90 |
| Third loss | $85 |
The size and order of hypothetical wins and losses matter. Raising the stake after losses is not a mathematical guarantee of recovery and may increase the chance of rapid depletion. Our separate drawdown calculator is intended to model a user-specified sequence rather than predict future trades.
Contract rules, jurisdiction and platform risks
Terms can differ in how they handle a tie, which price feed resolves the event, changes to offered payouts and any early-close mechanism. The financial product can also be restricted for retail customers in particular jurisdictions. An educational page does not establish where a platform is authorized to provide the product or where an individual is eligible to trade.
Investor.gov warns about misleading claims, unregistered websites and fraud complaints involving online binary-option products. Those are sector-wide issues; this article is not claiming an unverified violation by any particular provider. Before risking real funds, read the terms, verify eligibility and do not stake essential living expenses.
Four questions that settle an ambiguous expiration
- Reference price: which source and timestamp determine the final contract result?
- Comparison rule: is the agreed condition strictly above/below, or does the agreement describe equality separately?
- Display versus contract: is a rounded candle value being mistaken for the contractual settlement price?
- Special handling: do ties, refunds or early closure exist under the relevant product rules?
Without the operator’s actual rule, a price exactly equal to the threshold cannot be called a win, loss or refund with confidence. This page explains the general contract; the trading-platform guide handles Binarium-specific screen controls.
Binary options FAQ
Do binary options grant ownership of the underlying asset?
No. The standard binary-option contract is tied to a specified yes-or-no outcome, not delivery of the underlying asset.
Is the expiration time the same as candle timeframe?
No. Chart granularity, entry deadline and settlement instant are distinct concepts.
Does an 80% return mean I profit $180 from a $100 stake?
No. It means $80 net profit plus return of the $100 stake for a total credit of $180 in this simplified example.
Will 50% winning trades break even?
Not at an 80% payout with full-stake losses; the simplified threshold is about 55.56%.
Can a positive demo balance predict real profits?
No. A demonstration account does not establish future performance, liquidity or payment outcomes.
Is there a way to avoid a string of losses?
No method removes the uncertainty of each contracted outcome. Risk limits can only change the size of potential losses.
Are binary options available everywhere?
No. Local product and provider rules vary. Do not interpret access to an informational website as legal eligibility.
Further reading without mixing search intents
This page explains contract mechanics and does not duplicate a broker review or installation guide. To inspect one platform’s interface, use our Binarium trading terminal guide. For virtual funds and access, see Demo Account; for the mathematics of a chosen outcome sequence, visit the loss-streak and drawdown tool.
Independent educational content only. No strategy, payout rate or worked example constitutes personalized investment advice or an earnings claim.