A Binary option as the name suggests has only two possible outcomes – All or Nothing. Hence, a binary option is also known as “All or Nothing” Option. When one successfully trades an “All or Nothing Option”, one is rewarded either by way of a fixed amount of cash or a unit asset of the underlying instrument.

Binary option are typically classified into “Cash or Nothing” binary option and “Asset or Nothing” binary option. The classification of Binary Options is based on the nature of the reward given on a successful binary option trade. When the reward of a successful binary option trade is in fixed amount of cash, it is referred to as “Cash or Nothing” binary option. On the other hand, if the reward is in terms of the value that the underlying share has, it is referred to as “Asset or Nothing” Binary option.

Binary options are also classified as European Style or American Style. In a European style binary option, the price of the underlying security is compared to the strike price only at the end of the expiration period. Also, one does not get rewarded in case the strike price is achieved prior to the expiration date in a European style binary option. On the other hand, an American style binary option gets exercised the moment the price of the underlying security just brushes the strike price.

Irrespective of their types, Binary options are simple to trade and easy to understand. And this is what makes them a favorite with the trading community.