Like a traditional stock option contract, a typical binary option contract is a bet that the price of a stock or other asset will be above/below a specific strike price at a specific time in the future. However, the key to binary options is that there are only two possible outcomes if the contract is held to expiration: profit a specific, pre-determined amount, or lose 100 percent of the investment.

Related Link: How To Understand The Simple Risk Vs. Reward Values On Nadex One advantage to binary options trading is that the risk and reward of each trade is clearly-defined. While traders can (and often do) add to or subtract from binary options positions before expiration, the risk is always capped at a 100 percent loss, and the reward is always capped at the payout percentage.

The most common type of binary option is a “high-low” option. A typical high-low option works like this: a trader starts with a belief that a stock price will rise or fall within a certain amount of time. For example, imagine that Bank of America stock is trading at exactly $17.00 with 15 minutes left in the trading day. A binary options trader that believes that Bank of America will finish the day above $17.00 might buy $100 of binary “call” options for Bank of America with a strike price of $17.00 and a 70 percent payout.

According to Tim McDermott, General Counsel and Chief Regulatory Officer of Nadex, another major advantage to trading binary options is the accessibility and flexibility of trading. “Binary options on Nadex are very accessible to the retail trader, who can open a Nadex account in as little as 10 minutes online and with as little as $100 deposited into the account,” McDermott told Benzinga. “Traditional option accounts are much more difficult to open and typically require deposits of $10,000 or more.”

In the relatively brief history of binary options trading, there has been no shortage of controversy. As recently as last year, the SEC warned investors to be careful of fraud when trading binary options. These fraud warnings were issued specifically for websites that are not subject to SEC oversight, and the SEC recommends the use of registered exchanges such as Nadex to all binary options traders.

In addition to issues with fraud, binary options trading has drawn harsh comparisons to online gambling. A 2010 Forbes piece discussed the similarities between binary options trading and casino games, highlighting the fact that binary option contracts are not directly tied to any real underlying asset and that the spread between the payouts and losses is akin to the “house edge” at a casino.