Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Table of Contents
Binary options are a type of option trade based on a simplified yes or no question. When investors make a binary trade, they’re essentially speculating on whether the price of an option contract’s underlying asset will end up above or below a set strike price at a predetermined expiration. Depending on their prediction, the investor will either receive a fixed payout or lose their investment, with no middle ground in between.
Binary options trading involves significant risks and may also expose investors to fraud attempts. Before engaging in binary options trading, it’s important to be well-versed in how they work, precautions to be aware of, and their inherent risks.
Key Points
• Binary options are a type of contract in which the payout is fixed — traders receive either a set amount of funds or nothing at all.
• A binary trade requires predicting whether an underlying asset’s price will be above or below a strike price at a specified expiration time.
• Binary options are available on a range of assets, including stocks, currency pairs, and commodities through specialized brokerage platforms.
• Typical brokerages generally do not offer — and most markets do not trade — binary options.
• Binary options carry significant risks vs. standard options, including a heightened risk of fraud, and frequently trade on unregulated exchanges.
What Are Binary Options and Trades?
A traditional binary option is a type of options contract, in which investors bet whether the price of the underlying stock will be above or below the option’s strike price. In industry terms, they’re either “in the money” or “out of the money.” Prices, of course, can be hard to predict, which is what makes binary options something of a gamble.
Here’s a fairly straightforward example: You think that the price of Stock X will be $10 or more on January 4, at 4pm ET. You acquire a binary option contract with that stipulation. The other party on the contract holds the other position, that the price of Stock X, on the agreed upon time and day, will be less than $10.
When the clock strikes 4pm ET on January 4, Stock X’s price is either $10, or it’s less than $10. Only one person receives a payout, which is dependent on the outcome. There’s no middle ground. International traders may offer other variations of binary options as well.
Recommended: In-the-Money (ITM) vs Out-of-the-Money (OTM)
Binary Options’ Key Elements
Trading binary options requires understanding their key elements. These include:
• The strike price. With binary options, the strike price is the price target traders speculate upon. It’s the fulcrum point at which traders must choose a position — whether the underlying asset’s price will be above or below it at expiration.
• The underlying asset, security, or market. This is the security (stock, commodity, etc.) upon which the options contract is based. Since options are derivatives, they’re tied to an underlying asset.
• The expiration date. The day and time when the contract settles.
• The expiration price. The price of the underlying asset when the contract settles.
These elements (along with a few others) comprise a basic binary options contract.
How Binary Options Work
In effect, an options trader buys a binary option contract and the exchange matches the order with a trader who takes the opposite position. That is, if you were to buy a contract with the position that the option’s underlying asset will exceed the strike price on the agreed expiration day and time, others may have the equal and opposite position — they’re betting that the underlying asset’s value will not exceed the strike price when it expires.
When the expiration date arrives, one of the two predictions will be correct. The value of the underlying asset will either be above or below the strike price. The successful trader then receives a payout. That payout is typically either $100, or nothing, regardless of how much higher or lower the value of the security is compared to the strike price.
Like all options, pricing on binary options reflects the time value of the contract. Their price, though always less than $100, will fluctuate depending on their current price and the length until expiration. Binary options pricing is also influenced by the perceived probability of the trade.
Recommended: Call vs Put Option: The Differences
How Does Binary Options Trading Work?
Trading binary options is generally straightforward compared to trading standard options, given their binary “yes/no” structure. The mechanics of binary options trading involves choosing whether you believe the price of a contract’s underlying asset will be above or below a specified target price at expiration.
However, before trading binary options, it’s important to understand the risks involved, the trustworthiness of the exchange you’re working with, and whether binary options trading fits within your overall strategy.
Binary options trading is inherently risky because of its all-or-nothing framework — you either receive a predetermined cash payout or lose your investment. In addition, the Commodity Futures Trading Commission’s (CFTC) and the Securities & Exchange Commission (SEC) has issued a warning about the prevalence of fraud among online binary options trading platforms. Many of these groups are offshore, illegal outfits that lack the protections of U.S. regulations. (Binary options trading is also banned in certain regions.)
With that in mind, you’ll want to first make sure that the binary options trading platform is legitimate, including verifying that the platform and its product are registered with the SEC. From there, you can open and fund an account and start executing trades.
Example of a Binary Trade
Suppose a trader believes that the EUR/USD currency pair, which is trading at 1.2000, will rise by the end of the trading day. The trader purchases a binary call option with a strike price of 1.2000 and an expiration time set for market close.
If EUR/USD closes above 1.2000 at expiration, the trade is “in the money.” The trader receives the fixed payout — typically up to $100 minus the premium paid. If EUR/USD closes at or below 1.2000, the trade expires worthless and the trader loses the premium.
Pros and Cons of Binary Options Trading
As with any type of high-risk investments or trades, binary options have pros and cons. Here’s a quick look at them:
Binary Options: Pros and Cons
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Pros:
• Risks are capped
• Fast and efficient
• Known payouts
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Cons:
• Rewards are capped
• Highly speculative
• Fraud concerns
Pros of Binary Trades
There are some positives to trading binary options.
• Limited risk. Traders can only lose so much if they’re on the losing end of the trade.
• Efficient process. Binary options trading is usually a fast and efficient process, and they expire quickly.
• Known payouts. Since binary options are capped at $100, you know in advance what’s at stake.
Cons and Risks of Binary Trades
There are also some potential disadvantages to trading binary options.
• Limited gains. There’s only so much “winning” a trader can do with a given binary options contract.
• Speculative nature. Binary trades can feel like a wager rather than an options trading strategy because of its all-or-nothing design.
• Unregulated markets. Many brokerages and exchanges that offer binary options operate outside of the United States and lack regulation, increasing the risk of fraud.
How to Spot Binary Options Scams
The risk of fraud is more pronounced with binary options, as mentioned above. Many online platforms that allow traders to trade binary options don’t comply with regulatory requirements in the U.S. That means they’re not conducting business under the authority of the Securities and Exchange Commission (SEC) or other regulators.
Some of the more common types of fraud related to binary trading to look out for include identity theft, manipulating the trade through the software, and refusing to credit funds to customers.
1. Identity Theft
You’re likely familiar with identity theft, and some traders have lodged complaints with regulators that certain online trading platforms have been collecting personal data (credit card numbers, etc.) and then using it to commit fraud.
How might this play out in the wild? Let’s say you want to trade binary options, learn some common options trading terminology and, after a bit of searching, find a platform that looks easy to use. You sign up, provide some personal information, and start trading.
A while later, you might get alerts that your credit has been compromised, or something similar. This could be a sign of identity theft, and it may all stem back to when you gave your personal information to that trading platform.
It’ll require some investigation to get to the culprit (if it’s even possible), but the point is that some sites should not be trusted with personal information. Or, they may not adequately secure it.
As a rule, an important first step is verifying that the platform you’re working with is registered with the SEC.
2. Trade Manipulation
You can’t win if the game is rigged, right? This is another common complaint lodged against certain binary trading platforms. Some platforms have been accused of manipulating the software used to execute trades to ensure the trader ends up on the wrong side of the trade.
In effect, this would be a case of the dealer taking a peek at the next card in the deck during a game of Blackjack, seeing that you’re going to hit “21,” and replacing the winning card with another. On some unregulated platforms, this may be possible because the broker acts as the direct counterparty to the trade, giving it both a financial stake in the outcome as well as influence over how expiration prices are reported.
3. Refusing to Credit Accounts
Another common complaint is that some platforms accept customer deposits, but then don’t allow them to withdraw the funds. Platforms may cancel withdrawal requests, or ignore them, leaving traders unable to access their money.
If this happens and the brokerage or platform you’ve been dealing with is in a foreign country (or its location is unknown), you might be out of luck. Again, sticking to trusted, SEC-registered brokerages or platforms may help prevent these issues.
Understanding Binary Option Fees
The fees for trading differ depending on the platform or brokerage you’re using, so that’s something to keep in mind when deciding where you want to execute trades.
Some platforms make money through commissions, and as such, will incorporate fees into contract spreads. Others simply charge a per-contract fee. Check your preferred platform or brokerage’s pricing guidelines to make sure you’re comfortable with any applicable fees.
How to Trade Binary Options in 4 Steps
Trading options of any kind requires preparation. Binary options are no exception. Before entering a binary trade, it’s important to understand the key steps and decisions involved. These include choosing a registered broker, selecting the underlying asset, and setting the contract’s terms.
1. Choose a Regulated Broker
The first step is selecting a platform to trade on. In the U.S., binary options may be traded on exchanges regulated by the CFTC and SEC. Trading on a regulated exchange may offer meaningful protections that unregulated offshore platforms lack, including oversight of trade execution and safeguards for account withdrawals.
Before opening an account, verify that the broker or exchange and the binary trading product offered are registered with the SEC. Review its fee structure and contract terms carefully as well.
2. Select the Underlying Asset
Binary options are available on a range of underlying assets, which include stock indices, currency pairs, commodities, and economic events. The chosen asset should reflect familiarity with the market it’s in and how it tends to behave around events that impact price. Unlike trading stocks or other instruments where position size and timing can be adjusted, a binary options contract is fixed from the moment it’s opened. This makes asset selection particularly important.
3. Choose the Expiration Time
Binary options contracts expire at a specific time after which the investor does or does not receive a payout based on the outcome. Expiration times range from minutes to the end of a trading day, which depends on the platform and contract type. Shorter expirations carry higher risk because price movements are harder to predict over small intervals. Longer expirations allow more time for a position to play out, though it’s never possible to predict an outcome. Reviewing options trading strategies beforehand may help in thinking through which timeframe aligns with a given market view.
4. Decide on the Strike Price
The strike price is the level at which the binary contract is evaluated at expiration. A call option pays out if the asset closes at or above the strike price. A put option pays out if it closes below the strike price.
The relationship between a current market price and strike price also directly impacts the cost of a contract. Contracts that are closer to the current price can reflect a greater probability of expiring in the money and may carry higher option premiums.
The Takeaway
Whether you’re interested in binary options, standard options trades, or stocks and bonds, it’s important to do your homework first. That means understanding a financial instrument, be it a binary option, or a vanilla stock, before you add it to your portfolio.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
FAQ
Are binary options legal in the US?
Binary options are legal in the U.S., but only when traded on platforms or exchanges that meet the regulatory requirements of the Commodity Futures Trading Commission’s (CFTC) and the Securities & Exchange Commission (SEC). Many offshore platforms that market binary options to U.S. residents may operate illegally or without regulatory oversight.
Can you make a living trading binary options?
Although some traders may generate returns from binary options, it is very difficult to profit regularly from these trades, let alone generate enough returns to rely on as a main source of income. Binary options are generally viewed as speculative instruments rather than an investment strategy for building primary income.
How do binary options differ from standard options?
Standard options give a buyer the right (but not the obligation) to purchase or sell an underlying asset at a set price before expiration, with potential profits determined by the direction and extent of the asset’s price movement. Binary options have a fixed payout, either as a set amount or nothing, regardless of how far the asset moves from the strike price. Binary options also tend to have shorter expiration windows and fewer available strategies than standard options contracts.
Do I have to pay taxes on binary options?
Gains from binary options trading are generally considered taxable income in the U.S. and must be reported to the IRS. The specific tax treatment may depend on how the contracts are classified and the trader’s overall tax situation. Consulting a tax professional familiar with derivatives about your personal circumstances may be a good idea before trading binary options.
Are binary trades considered gambling?
Binary options share structural similarities with gambling: both involve fixed-odds outcomes and a binary result. However, binary options are financial contracts tied to real asset prices and traded on regulated exchanges, which distinguishes them legally from gambling in most jurisdictions. Critics and regulators have noted the resemblance to wagering, and some countries have banned or heavily restricted binary options for retail traders on those grounds.
Photo credit: iStock/dinachi
This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
This article is not intended to be legal advice. Please consult an attorney for advice.
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