Binary options for the S&P and VIX began trading at the CBOE for the first time on Tuesday. So what the heck are binary options.
Binary options (also called all or nothing options) are a type of trade where the payoff is either all or nothing, explains optionMonster and Fast Money favorite Jon Najarian. There’s no in-between.
CBOE binary options contracts, on which calls will be listed first, will pay either a fixed cash settlement amount if the underlying index settles at or above the strike price at expiration, or nothing at all if the underlying index settles below the strike price at expiration.
These binaries expire on the Wednesday of each month. However, they’re not knock out options. So, if you’re betting to the upside on the S&P, then the S&P has to be on your strike price or above it at the time of expiration.
The products are expected to attract a broad range of participants, including individual investors, hedge funds and institutions, who have an opinion, one way or another, on future price movements in the SPX or the VIX, said CBOE chairman and Chief Executive William Brodsky in a statement.
And if your eyes have glazed over from the explanation above just look at binary options as training wheels for other types of options.
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Trader disclosure: On July 1, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (C), (AGU), (BTU), (GS), (INTC), (MSFT), (NUE); Finerman Owns (GS); Finerman's Firm Owns SPX Index Puts; Finerman's Firm And Finerman Own (C) And (C) Leaps; Finerman's Firm Owns (MSFT), (SUN), (TSO), (VLO), (SBUX); Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM); Pete Najarian Owns (AAPL), (NOK), (TSO), (XLF); Pete Najarian Owns (HBC) Puts, (MER) Puts, (RIMM) Calls, (SLB) Calls, (UBS) Calls, (WM) Calls, (YHOO) Calls; Seymour Owns (AAPL), (CFC), (F), (MER), (MSFT), (TSO), (TSL); Seygem Asset Management Owns (TTM), (PKX), (FMX); Seygem Asset Management Owns Shares Of Grupo Modelo