Binary Options Frequently Asked Questions (FAQ)

1. What is the CBOE?

The Chicago Board Options Exchange (NASDAQ: CBOE) which is located in Chicago, is the biggest US options exchange with a trading volume each year of around one billion contracts. CBOE offers options of over 2,200 companies plus 22 stock indices, and 140 exchange-traded funds (ETFs).

2. What are the main differences between binary options and traditional options?

Binary options are generally priced lower than traditional options. This is because the payout for a binary option is fixed whereas the payout for a traditional option varies according to the value of the underlying asset.3. Is it possible to liquate a binary option position before its expiry time?

As with traditional options, it is possible to liquidate  binary option position before it expire by putting in a sell order (if you are going long) or a buy order (if you are going short) to your broker. The orders will executed and cleared through the OCC and your account will be consolidated. If there is a positive difference after consolidation, that difference will represent your profit.

4. What is the consequence of the underlying asset price that closes above the selected strike price before the expiration period?

Price fluctuation that occurs before the expiration period will have no effect on the binary option. A payout will only occur when the underlying asset price is at or above the strike price during the time of expiration.

5. What happen when the price of the underlying asset close AT the strike price?

With a CBOE binary Call option; if the underlying asset closes at the strike price, this will trigger a payout.

6. Where are binary options traded at?

As with traditional options, binary options are exchange listed financial instruments that are traded through CBOEdirect, the in house electronic trading platform of the CBOE. CBOE binary options can be traded with any normal approved securities account.

7. Is it possible to trade binary options through a regular option account?

All trading account which has been approved for trades in traditional options will permit you to trade in binary options as well. Nevertheless, not all broker offer trades in binary options. Below are some of the companies that do offer trades in binary options:

  • Barclays Capital
  • Citigroup Global Markets
  • Compass
  • Credit Suisse
  • Goldman Sachs
  • J.P. Morgan
  • Legent
  • Merrill Lynch
  • Morgan Stanley
  • optionsXpress,
  • Penson Financial
  • Scottrade
  • Société Générale
  • thinkorswim
  • TradeKing
  • UBS

8. How is the pricing of binary options done?

Normally, the prices of CBOE binary Call options will reflect the market sentiment about the likelihood of the underlying asset closing at or above the strike price (for Put options, below the strike price). These prices are quoted in increments of pennies that range from one (1) cent to one hundred (100) cents per contract. Because the contracts have a multiplier of 100, the price that is actually paid out will be one hundred times larger.

9. Are the settlement values of binary options determined the same way as traditional options?

As with traditional options, the settlement value of binary options is decided in the same manner.

For S&P 500 (SPX), the settlement value is based on the opening selling price of each component stock in the primary market of the last business day (normally Friday) prior to the expiration date. The symbol used on the ticker counter for this value is ‘SET’. Thus, if the ‘SET’ is at or above the strike price, then the SPX binary Call option will payout $100. Nothing will be paid out if the ‘SET’ is less than the strike price.

For VIX binary options settlement value, it is based on the VRO (exercise settlement value) for the CBOE volatility index (VIX). The VRO is a quote called the ‘Special Opening Quotation’ (SOQ) of the CBOE volatility index derived from the series of opening prices of underlying assets used to determine the index on the expiration date. If there is no trade in any of the underlying asset, then the average between the ‘Bid’ and ‘Ask’ price of that asset will be used as the opening price of that asset. The settlement value of VIX binary option is $100 just like the SPX binary option. Payout is triggered when the VRO is at or above the strike price.

10. Is it possible to exercise the CBOE binary option before the expiration date when the price of the underlying asset breaches the strike price?

Because CBOE binary options are European styled options, this mean it is not possible to exercise these options before their expiration date. Nevertheless, it is still possible to liquate one’s market position before the expiration of the option contract at the market price (or buy back if you had gone short). Take note, in most cases the maximum bid price for the option will only be $100 (As per the payout upon expiration).

11. Is the expiration date for CBOE binary options the same as traditional options?

Both CBOE binary options and traditional options expire and settle on the same day and time for the same underlying asset. For example, both SPX binary option and traditional option expiration date is on the 3rd Saturday of the expiration month. The last day of trading in for these options will be the 3rd Thursday of the expiration month. Settlement value is based on the 3rd Friday of the expiration month opening price.

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