Binary Trading Facts 2 — Questions and Answers
Question 1: What is the maximum loss a trader can incur on a single standard binary option position?
- The full premium paid (Correct answer)
- Twice the premium
- Unlimited
- Half the premium
Correct answer: The full premium paid
A binary option's downside is capped at the premium (stake) paid to enter the trade.
Question 2: A binary option that expires 'in the money' typically pays out which of the following?
- A fixed predetermined amount (Correct answer)
- A percentage of market volatility
- The underlying asset's full value
- A variable amount based on how far in the money it is
Correct answer: A fixed predetermined amount
Binary options have a fixed, all-or-nothing payout regardless of how far in the money they finish.
Question 3: In the United States, which regulator oversees legally traded binary options on designated exchanges?
- CFTC (Correct answer)
- FDA
- FCC
- SBA
Correct answer: CFTC
The CFTC regulates U.S. binary options traded on designated contract markets such as Nadex.
Question 4: What does the 'strike price' represent in a binary option?
- The price level that determines the win/loss outcome (Correct answer)
- The broker's commission rate
- The total payout amount
- The expiry time of the contract
Correct answer: The price level that determines the win/loss outcome
The strike price is the threshold the underlying must be above or below at expiry to win.
Question 5: A 'call' (or 'high') binary option profits when the underlying asset's price does what relative to the strike at expiry?
- Finishes above the strike (Correct answer)
- Finishes below the strike
- Stays exactly at the strike
- Moves with high volatility
Correct answer: Finishes above the strike
A call/high binary pays out if the underlying settles above the strike price.
Question 6: Which exchange is the best-known regulated venue for retail binary options in the U.S.?
- Nadex (Correct answer)
- NYSE
- CBOT
- LME
Correct answer: Nadex
Nadex (North American Derivatives Exchange) is the leading CFTC-regulated binary options exchange.
Question 7: On a regulated exchange like Nadex, binary option contracts are typically priced between what range?
- $0 and $100 (Correct answer)
- $0 and $1
- $1 and $1000
- $100 and $500
Correct answer: $0 and $100
Nadex binary contracts trade between $0 and $100, settling at $0 if out of the money or $100 if in the money.
Binary Trading Facts 2
What is the maximum loss a trader can incur on a single standard binary option position?