Q - 1. How are Binaries different from traditional options?
A - 1. Generally, the pricing for Binary Options versus traditional options is different, reflecting the fact that Binary Options pay out a fixed amount whereas traditional options' value (or payout) increases as the underlying increases.
Q - 2. Can I sell out of my Binary Options position before expiration?
A - 2. Yes, just like a traditional option, you can choose to sell out or liquidate your position before expiration by entering a sell order (if you are long or a buy order if you are short), which, when executed, will be cleared at the OCC and offset your existing position. If you sell your Binary Option for more than you paid for it, you will collect the difference.
Q - 3. What if the underlying closes above my selected strike price prior to expiration?
A - 3. The underlying needs to close at or above your selected strike price on expiration day to trigger the payout. A closing price above your strike price before expiration has no affect on the contract and does not trigger a payout.
Q - 4. What if the underlying closes AT the strike price?
A - 4. CBOE Binary Call Options pay out if the settlement value is at or above the strike price.
Q - 5. Where do Binary Options trade?
A - 5. CBOE Binary Options are exchange-listed contracts that trade electronically through CBOEdirect, just as traditional options do. You can trade CBOE Binary Options through a regular securities account that has been approved for options trading.
Q - 6. Can I trade Binary options through my regular options account?
A - 6. Binary options can be traded in a securities account that has been approved for traditional options trading. However, not every brokerage firm offers these products yet. Some of the firms that do offer them include Barclays Capital, Citigroup Global Markets, Compass, Credit Suisse, Goldman Sachs, J.P. Morgan, Legent, Merrill Lynch, Morgan Stanley, optionsXpress, Penson Financial, Société Générale, thinkorswim, TradeKing and UBS. Check with your broker for availability.
Q - 7. How are Binary Options priced?
A - 7. In general, the prices quoted for Binary Options will reflect the market's perceived probability that the underlying security will close at or above the strike price, in the case of Calls (or below the strike price in the case of Puts). Prices of CBOE Binary Options are quoted in penny increments ranging from one cent to 100 cents ($1.00) per contract. Each contract has a multiplier of 100, so the actual price paid will be between $1 and $100. ($.01 x 100 = $1 to $1.00 x 100 = $100).
Q - 8. How is the settlement price determined?
A - 8. The settlement price for CBOE Binary Options is the same as the exercise-settlement value for traditional options.
In the case of the S&P 500 Index (SPX) the exercise-settlement value is calculated using the opening reported sales price in the primary market of each component stock on the last business day (usually a Friday) before the expiration date. Ticker symbol for this value is "SET."
The exercise-settlement amount, or payout, for S&P 500 Binary Call Options will be $100, if SET is equal to or greater than the S&P 500 Binary Call Option strike price; or $0 if SET is less than the S&P 500 Binary Call Option strike price.
The exercise-settlement value for VIX Binary Options will be the same as the exercise-settlement value (VRO) for CBOE Volatility Index Options (VIX). VRO is a Special Opening Quotation (SOQ) of the VIX calculated from the sequence of opening prices of the options used to calculate the index on the settlement date. The opening price for any series in which there is no trade shall be the average of that option's bid price and ask price as determined at the opening of trading. Exercise will result in delivery of cash on the business day following expiration.
The exercise-settlement amount for VIX Binary Call Options will be 1) $100, if VRO is equal to or greater than the VIX Binary Call Option strike price; or 2) $0, if VRO is less than the VIX Binary Call Option strike price.
Q - 9. Can I exercise my CBOE Binary Option before expiration if the underlying price goes above my selected strike price?
A - 9. No. CBOE Binary Options are "European style" which means that they may be exercised only on the last business day prior to expiration. Writers (or sellers) are subject to assignment only at expiration. However, you may sell out of (or liquidate) your position at any time during the life of the contract, at the market price (or buy back your position if you have sold short to begin with). Under most circumstances the maximum bid price for a CBOE Binary contract will be $100.
Q - 10. Do CBOE Binary Options expire on the same day as traditional options?
A - 10. Yes, CBOE Binary Options will expire and settle at the same day/time as the traditional option on the same underlying. For example, expiration for the S&P 500 (SPX) Binary and traditional option expiring prior to February 15, 2013 generally is the Saturday following the third Friday of the expiration month. The last trading day for such options is generally the Thursday before the third Friday of the expiration month and the settlement value is calculated on Friday morning's opening.
Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. The information on this website is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in the website information. No statement within the website should be construed as a recommendation to buy or sell a security or to provide investment advice. The inclusion of non-CBOE advertisements on the website should not be construed as an endorsement or an indication of the value of any product, service, or website. The Terms and Conditions govern use of this website and use of this website will be deemed acceptance of those Terms and Conditions.