A binary option is an option where you either lose everything or win a predetermined award. The award can be a certain amount of cash or something else, e.g. the underlying asset.
With a traditional option, it is possible to lose money, gain some money, gain a lot of money, etc. With a binary option, there is no sliding scale. You either lose the entire purchase price or you win the predetermined reward. This is why its called binary option; there are only two possible scenarios.
When binary options first appeared, they were normally tied to the price of an underlying stock. Today, you can find a broad range of binary options tied to almost anything. A stock price, the movements of an interest index, the price of a certain commodity, the price of one currency in relation to another, etc.
Many of the most popular binary options have a very short time span between purchase and expiration. It is possible to find binary options online that will expire 1 minute after your purchase. Of course, long-lived binary options are also available, as well as anything in between.
Since a binary option has a predetermined award in the case of a win, they are sometimes referred to as Fixed Return Options (FRO) or All or Nothing Options.
In many jurisdictions, binary option trading is treated more like casino gambling and less like traditional investments in financial instrument such as old-fashioned stock options.
I recommend that you visit binaryoptions.co.uk if you want to know more about binary options and what you should think about before you start trading with binary options. Binaryoptions.co.uk features a lot of information about binary options and the website also let you compare binary options brokers so that you find the one that suits you the best.
Almost a binary option
Trading platforms online where you can trade in binary options will often also offer a type of option that is almost but not quite a binary option. These options are often marketed as binary options, even though they aren’t all-or-nothing options. With these options, more than two outcomes are possible. You may for instance get a part of the purchase price back if you come close enough to winning.