By definition, a binary option is a type of digital option where the payoff is a fixed amount of money if the option expires ‘in the money’, or a small percentage of your initial investment if it expires ‘out of the money’.

Now, for an example. Let’s say Google is currently priced at $525 and I believe that the price will rise to around $528 in 30 minutes. I could place a ‘call’ which means I believe it will go up, and then wait between 30 minutes to one hour depending on when the option I chose expires.

If I felt Google was going to go down I could place a ‘put’. Now, if at the end of the options expiration time if you were ‘in the money’ which means it closes above the price I purchased the option at I win my investment back plus 71% of my total investment. So if you are using Traders Room to trade for example and you had invested $100, you would win back your investment of $100 + $71. If you were to lose you would walk away with only 5-10% of your initial investment.

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