# Binary Options: Fixed Payouts, Pricing, and Platform Risk

Learn how binary options pay, why quoted prices are not simple probabilities, and how discontinuous settlement and platform fraud create risk.

Canonical: https://wiki.fcontext.com/options/binary-options/
Fact checked: 2026-07-22

> For educational purposes only; not investment advice.

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## Direct answer

A **binary option** pays a fixed amount if a stated condition is satisfied and otherwise pays zero. A cash-or-nothing call with payout `Q`, strike `K`, and expiration price `S_T` has payoff:

`Q × 1(S_T > K)`

The indicator is either one or zero. A one-cent difference around the settlement threshold can therefore change the entire payout. Contract wording may instead use `≥`, a put condition, a price range, or another verifiable event, so the official rulebook controls.

Binary options are not the same as ordinary listed calls and puts. Some lawful exchange-traded event contracts exist, but regulators have repeatedly warned that many internet binary-option platforms operate illegally or fraudulently.

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## Price, probability, and settlement

In a simplified frictionless model, current value is the discounted risk-neutral expectation of the payout:

`Binary value = discount factor × Q × risk-neutral probability(condition)`

That risk-neutral probability is a pricing quantity, not a direct forecast of the real-world chance of success. Market price can also include bid-ask spread, fees, inventory, liquidity, credit, and contract-specific settlement risk. Dividing a quote by the maximum payout without these adjustments can produce a misleading “probability.”

Near the threshold, the payoff has a discontinuity. Small changes in spot, volatility, time, or the settlement print can move value sharply. Unlike an ordinary call, a higher terminal price beyond the threshold does not increase the fixed payout.

Settlement definitions matter: data source, observation time, averaging method, rounding, disruption rules, and treatment of a price exactly at the threshold. A platform that controls its own displayed price, customer funds, and settlement decision creates a fundamentally different risk from a regulated market with independent clearing and published rules.

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## $100 payout example

Suppose a binary call costs `$45` and pays `$100` if an official settlement price is above `$50` at expiration; otherwise it pays `$0`.

- At `$50.01`, gross payout is `$100` and profit before fees is `$55`.
- At `$49.99`, payout is `$0` and the entire `$45` stake is lost.
- The expiration breakeven success frequency over repeated identical trades is `45 / 100 = 45%` before fees only if the `$45` price and `$100` payout are both actually obtainable and outcomes are independent and identically distributed.

A quoted price of `$45` does not prove a 45% real-world probability. If total entry and settlement fees are `$3`, the success frequency required merely to break even becomes `48%`. A withdrawal refusal can make the economic payoff zero even after the displayed contract wins.

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## Due-diligence checklist

- Verify the venue, intermediary, registration status, jurisdiction, and disciplinary history with the relevant regulator.
- Read the exact condition, comparison operator, data source, observation time, time zone, and disruption rules.
- Confirm maximum payout, stake, every fee, withdrawal terms, and custody of customer assets.
- Distinguish a risk-neutral pricing probability from a statistical forecast.
- Stress settlement immediately above and below the threshold and any disputed or missing data.
- Avoid sending more money to unlock withdrawals or recover prior losses; this is a common fraud pattern.
- Preserve account records and communications, and report suspected fraud promptly.

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## Common misconceptions

- “Binary means the risk is simple.” The payout is simple; settlement, pricing, platform, and legal risks may not be.
- “A $45 price means a 45% chance.” That inference requires assumptions and adjustments that may not hold.
- “A winning screen balance is cash.” It is not realized if the platform blocks withdrawal.
- “Limited loss makes expected value favorable.” A capped stake can still have persistently negative expected value.
- “Being right about direction is enough.” The exact threshold, observation time, and settlement source decide the result.
- “All binary options are illegal.” Legal status depends on product, venue, intermediary, and jurisdiction; verify rather than infer.

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## Related topics

- [Cash Settlement](/options/cash-settlement/)
- [Expiration Date](/options/expiration-date/)
- [Calls and Puts](/options/call-and-put/)

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## Authoritative sources

- [Binary Options Fraud](https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/fraudadv_binaryoptions.html) - Commodity Futures Trading Commission
- [Investor Alert: Binary Options and Fraud](https://www.sec.gov/investor/alerts/ia_binary.pdf) - SEC and CFTC
- [Binary Options](https://www.finra.org/investors/insights/binary-options) - FINRA