CBOE Binary options are contracts that, at expiration, pay out a pre-determined, fixed amount of $100 or nothing at all. CBOE lists put and call CBOE Volatility Index Binaries (BVZ).
Like traditional options, Binary Options are based on an underlying security, have various strike prices to choose from as well as various expirations. CBOE lists both call and put Binary Options. If, at expiration, the price of the underlying security closes at or above the selected strike price, the buyer of a call Binary Option receives $100 per contract. If the underlying security closes at a price that is below the strike price on the expiration date, the buyer receives nothing.
In the case of put Binary Options, the put buyer receives $100 per contract if the underlying security closes below the strike price at expiration, and nothing if the underlying security closes at or above the strike price at expiration.
As with traditional options, a Binary option position may be liquidated (bought or sold to close) prior to expiration.
The price of a Binary Option usually reflects the perceived probability that the underlying security price will reach or exceed (for call Binary Options) or fail to reach or exceed (for put Binary Options) the selected strike price at expiration. The cost of CBOE Binary Options will normally be quoted at a price between zero and $1 (which equates to $1 to $100 per contract). Buyers of Binary Options pay for the contract at the time of purchase.
CBOE Binary Options are cleared through the Options Clearing Corporation (OCC) and can be traded in a regular securities account that is approved to trade options.