In many respects, regular options and binary options are similar and there is only one major difference. These are based on a system where maximum loss and profit is known by the trader beforehand. It is this feature of these options that makes it easier for people to calculate the risk and reward associated with them before making a trade. They are also known as all-for-nothing or digital options. These options are regarded as an easy form of investment, especially for novices. Banks looking to hedge their interest rate and currency risks and investors following financial trends in the market are keen to invest in binary options.

In simple terms, these options have payoffs and cash settlements, which are discontinuous, meaning that they are broken down into several installments. There are different types of binary options that are traded in the market, but the most popularly used are cash-or-nothing options. Typically, they are either American or European style. In case of European options, the underlying prices should exceed when the expiration date is reached. As far as American style options are concerned, they are put into effect automatically when the strike amount is reached by the price and it gives rise to completely different results.