Binary options trading has been around for decades but their growth exploded 2011. Why the phenomenon? Most likely it was due to the financial crisis from 2007 through 2009. Levels of fear and uncertainty which had not been felt since the Great Depression struck investors during this time. Investments that were once viewed as stalwarts that could not fail cratered. This included blue chip stocks, government sponsored entities (GSE’s), bonds, and preferred stock of many financial companies that were considered too big to fail. Most went to the brink, and some like Washington Mutual, Lehman Brothers, and Bear Stearns did not survive.
This new reality of uncertainty created a desire by many investors for products that offered a fixed payout. Unfortunately, most traditional fixed income investments were not attractive due to the US Federal Reserve Board led by Ben Bernanke setting interest rates at artificially low levels in an attempt to spur investment and spending. Money markets and Treasury Bonds offered yields that did not even outpace inflation. Binary options, which offer only two possible outcomes for an investment, helped to fill the void. Investors were willing to risk on an occasional zero payout when on the wrong side of the option in exchange for one of the few investments that offered a decent return when the investor was correct.
Another appeal of a binary option for investors is the ability to bet on both the upside and downside. Call or Put options are available just like with regular stock options and LEAPs. Calls are sometimes referred to as Up or Finish High and Puts as Down or Finish Low. Another difference is that the expiration works like European style options. The most common type of binary option is the cash-or-nothing option. The Securities and Exchange Commission (SEC) allowed listing of this type in 2008. Fixed return options (FROs) are the term you will find used by the American Exchange (AMEX) for binary options. Asset-or-nothing options are another type of binary or digital option.
The demand for brokers that offer binary options trading is very strong. The best binary options brokers attract investors by offering enticing features such as demo accounts where an individual can learn the ropes as well as convenient funding sources like PayPal or credit card. Investors love the flexibility of being able to trade options in various financial instruments like commodities, currency, stocks, and indexes. The extremely short expiration of some binary options also can be somewhat addictive to some active traders seeking instant gratification.