How to Trade Binary Options at Schwab

Binary options are a relatively straightforward way for traders to speculate on short-term market moves. However, their all-or-nothing structure comes with unique risks that traders should understand before placing a trade. Knowing how binary options differ from traditional options can help traders better assess how each option type may—or may not—align with their trading strategies and personal goals.

A binary option is a type of derivative contract that offers a fixed, all-or-nothing cash payout based on the outcome of a basic yes-or-no proposition. Typically, that proposition is whether the price of an underlying asset—like a stock or broad market index—will close above or fall below a specified price on a set date.

With binary call options, traders receive a fixed payout if the underlying closes at or above the specified strike price. With binary put options, traders receive a fixed payout only if the underlying closes below the specified strike price.

This structure can make binary options particularly risky. A contract that finishes just on the wrong side of its strike price will expire worthless, while a large move in a trader's favor doesn't increase the fixed payout. That makes accurately predicting whether the underlying asset will finish above or below the strike price especially important.

Binary options share a lot of terminology with traditional options, but the similarities between the two are actually quite limited.

While binary options allow traders to speculate on a simple "yes" or "no" proposition, traditional options offer more flexibility. They can be combined to create various types of complex trading strategies, allowing traders to manage risk, generate income, or potentially profit—even without taking a stance on the direction of the underlying.

Traditional options also give buyers the right, but not the obligation, to buy or sell an underlying security at a set price within a specific time frame. Binary options don't provide that right. Instead, any potential payout is simply settled in cash at expiration.

Moreover, traditional options' value is driven by more than just the price of the underlying. Factors like time to expiration, implied volatility, interest rates, and more all play a role. This makes traditional options' risk and reward profiles far more complex.

The maximum potential gain and loss of a binary option are always known before the trade is placed, but traditional options can have defined or undefined risk depending on the strategy, and their potential payoffs tend to fluctuate continuously.

The table below summarizes the key similarities and differences of binary and traditional options:

Schwab offers Mini-S&P 500 Index (XSP) binary options under the symbol $XSPBX. Only long calls and long puts are available; there are no short binary options. Cboe Global Markets only lists zero days to expiration (0DTE) and one day to expiration (1DTE) binary options at this time.

Importantly, the settlement value (fixed payout) for binary options is $1.00, regardless of the expiration date, strike price, or underlying security. The contract multiplier is 100, meaning the cash payout for a correct "yes" or "no" prediction is $100 ($1.00 x 100) per contract minus the premium paid.

Let's walk through two examples to illustrate how binary options work. Note that these examples exclude the impact of taxes, commissions, and fees, which could alter the potential net gain or loss for traders.

Scenario 1: A binary call option

Suppose $XSPBX is trading at $775, and a trader buys a 0DTE call at the 780-strike for $0.50.

• If $XSPBX closes at $780, the trader receives the $1.00 fixed payoff. Subtracting the $0.50 premium paid ($1.00 - $0.50) and multiplying by the contract multiplier ($0.50 x 100), the trader's net profit is $50.
• If $XSPBX closes at $800, the trader still receives only the $1.00 fixed payoff, resulting in the same $50 net profit despite the large move above the strike price.
• If $XSPBX closes at $779, the call expires worthless and the trader loses the $0.50 premium paid. Multiplying by the contract multiplier, the trader's net loss is $50 ($0.50 x 100).
• If $XSPBX closes at $750, the call still expires worthless, resulting in the same $50 net loss despite the larger move below the strike price.

Scenario 2: A binary put option

Suppose $XSPBX is trading at $775, and a trader buys a 0DTE put at the 770-strike for $0.50.

• If $XSPBX closes at $769, the trader receives the $1.00 fixed payoff. Subtracting the $0.50 premium paid ($1.00 - $0.50) and multiplying by the contract multiplier ($0.50 x 100), the trader's net profit is $50.
• If $XSPBX closes at $750, the trader still receives only the $1.00 fixed payoff, resulting in the same $50 net profit despite the large move below the strike price.
• If $XSPBX closes at $770, the put expires worthless and the trader loses the $0.50 premium paid. Multiplying by the contract multiplier, the trader's net loss is $50 ($0.50 x 100).
• If $XSPBX closes at $800, the put still expires worthless, resulting in the same $50 net loss despite the larger move above the strike price.

Note: As previously mentioned, call options must close in-the-money (ITM) or at-the-money (ATM) for traders to receive this payout, while put options must close ITM.

Binary options trading is available on all Schwab platforms, including thinkorswim^®, thinkorswim Web, Schwab.com, and Schwab Mobile. 

The order process is straightforward and similar to buying a traditional call or put option. Let's walk through how to buy a binary call option in three steps using thinkorswim desktop:

Step 1: Search for $XSPBX (1) in the symbol selector and open the Option Chain (2). Then select the desired option (call or put), strike price, and expiration date (3).

Step 2: Review the order in the Order Entry field to ensure the correct option was selected, then press Confirm and Send (4).

Step 3: The Order Confirmation Dialog box will automatically open. Confirm the order is correct, review key information, such as the maximum profit and maximum loss, then press Send (5).

Binary options may seem straightforward, but their all-or-nothing structure can create some unusual risks. Here are a few final considerations to keep in mind before trading:

• Expect volatile price movements near expiration. Binary options can be more volatile than traditional options when the current underlying price is at or near the strike price as expiration nears. This is because even a small price move can significantly change the likelihood that a binary option will result in a full payout.
• Short expirations leave little room for error. With only 0DTE and 1DTE expirations available for binary options at this time, traders will have limited time for unfavorable price moves to reverse before expiration. Remember, getting the price direction right may not be enough if the move doesn't happen in time.
• Keep liquidity in mind. Binary options are new and very-short-dated products, so potential liquidity issues are worth considering. While these options can generally be closed before expiration, lower liquidity could widen bid-ask spreads, potentially making it more difficult or expensive to exit a position.