Binary option payoff example

Binary Option Payout Rates Explained. October Special Offer: Get started with only €50 at HighLow #1 Ranked regulated broker: Get Started Here! Payout rates in binary options represent a certain percentage of the money invested by a trader on a trading contract. In case traders manage to accurately predict the outcome of an options trading contract, they will receive their initial investment back plus the payout percentage of the initial investment. But how are binary options payout rates calculated? – And more importantly, which are the best payouts in the financial trading business. Likewise, which are the binary options types that offer the larges and best paying payout rates in the financial trading business. In this page we’ll answer all of these questions. In this article you’ll also find out which are the binary options brokers with the best and highest payout rates. Understanding how payouts work in this form of online trading is important in becoming a successful trader. Advanced Tools and Features. Always Read Brokers’ Terms and Conditions. Benefits of Binary Trading. Complete Guide on Online Trading.

Everything about Expiration Times. How are binary options taxed? How do Brokers Make Money. Learn about Assets in Binary Trading. Options Vs. Traditional Trading. Payout Rates – The Ultimate Guide. What are Payout Rates in Binary Options? As explained above, a return rate in binary options is the profit rate promised by the broker to traders. The payout rate always represents a certain percentage of the amount of money traders invested into their trading contract. In case a trader will correctly predict the outcome of a trading contract, then he or she will receive the initial investment back as well as the promised percentage of the initial investment based on the payout rate. Consider the below example to better understand this: – A broker allows you bet on the fact that Microsoft’s stocks will be either above or below $100 by today 20:00. – The broker promises a payout rate of 80% – The trader decided to predict that the stocks will be above $100 and invests a sum of $100. In case the trader will accurately predict the outcome of the contract mentioned above, then he or she will be rewarded with a total sum of $180. From this sum $100 represents the initial investment and the $80 represents the profit based on the payout rate of 80%. So basically the return rate represents the profit rate promised by the broker to traders on successful trades.

The return rate indicates the profit rate a trader could achieve by correctly predicting a trading contract. How are profit percentages calculated? Financial spread betting return percentages are usually established by the broker in advance. The general rule is that the easier an option can be predicted the lower the payout rate will be. On the other hand, the harder the outcome of an option can be predicted, the larger the profit rate is. The average payout rate in the financial trading business is around 85% at this moment. However, this average is expected to become 95% in the near future. As such, we don’t even list brokers on our website that offer payout rates lower than 85%. Anyone offering payouts lower than this is below average. Best Binary Options Return Rates. As hinted above, the average profit rate offered in the financial trading business at this moment is 85%. This means that with trades of $100 traders can in average generate revenues of $180. However, this rate is expected to become around 95% in the near future. Like explained above, the profit rate of a binary option usually also depends on the difficulty of the option. The movement of commodities is usually easier to predict and as such contracts involving commodities offer lower payouts. Forex pairs are a bit harder to predict and as such, they offer better return percentages.

The payout rates of binary options also depend on the type of the binary option. This is because some binary contract types are easier to understand and to predict than others. Here too, easier options have lower winning rates and more difficult contracts have higher return rates. Highlow option return percentages. Highlow contract types are the simplest contracts available. These contracts only require traders to predict if the value of an asset will increase or decrease during a certain time frame. As such, they offer the lowest payout rates in the options trading business. The most common highlow contracts offer payout percentages between 65% and 95%. Highlow options usually never offer payout rates above 100%. They might pay out less than other types of contracts but they are easier to predict ensuring a higher success ratio. – As such, they are recommended to newcomers. One-touch options payout rates. One-touch contract types are a bit more complicated to predict than highlow options.

In this trading type traders will have the task to predict if the value of an asset will reach a certain pre-established value during a certain time frame. One-touch binary option return percentages are usually in the 100%-200% range. As such, they are recommended to intermediate to expert traders. Experienced traders will be able to achieve very high success percentage with one touch-options that in turn will allow them to profit form the high payout rates. Boundary options payout rates. Boundary contracts are the most complicated trading contract types in the business. This is because contracts of this kind will have two strikes. Traders win or lose depending on the fact if the value of an underlying asset will reach one of the two strike lines during a certain time frame. Due to the fact that these options can be predicted harder than other contract types, they offer very high return ratio. Payout rates of 200% to 500% are not infrequent in the case of range contract types. However, these options are only recommended to expert traders. 60 seconds contracts payout percentages. 60 seconds contracts are simple highlow contracts with expiry times of just 60 seconds.

The fact that they are simple highlow contracts ensures that most traders can easily predict them. However, they aren’t as easy as normal highlow options because of their very short expiry time. Because they are a bit more difficult to predict than normal highlow contracts, they offer higher payout rates. Return ratios of 100% to 150% are considered normal when it comes to 60 seconds trading contracts. Binary Options Brokers with the Best Payouts Rates. If you have read everything above, then by now you’ll know everything about payout rates in binary options trading. Now it’s time to find out everything about the binary options brokers that offer the best payout rates. You should only register at a broker that offers very high Return ratios. Like explained above, the current average payment rates in the financial spread betting business are at around 85%. You should not register at a broker that has payout rates lower than this rate. The binary options brokers with the highest payout rates always offer percentages of at least 85%. Likewise, it’s also important to check if the broker offers high return ratios individually in case of all the different options types. A payout rate of around 85% is above average in case of highlow options. In case of other option types, payout rates of above 100% and 200% are normal. The binary options brokers we’ve listed on this page and overall in all of our pages of our website offer a minimum payment rate of 85%. In order words, they don’t just offer an average payout rate of 85% but instead this is the minimum offered value by them. They of course also offer above average services in all aspects other than the payout rate.

Check out these brokers in case you want to register and receive very high return percentages. Also, read our additional educational articles to learn to become a winning trader. Latest Binary Options Articles & Guides. Do I have to pay taxes on binary options winnings? - This is the question we get asked almost every day. In this comprehensive article we will explain how binary options taxation works in various countries. In this article I will explain why it is absolutely necessary for you to read a broker's Terms and Conditions before you register and make a real money deposit. Many binary options brokers have various advanced tools and features such as closing options before expiration, double down and sell option. Learn how you can use these tools to your advantage. Binary call option value.

P = price of the option. t = time in years to expiry. δP = a change in the value of P. δt = a change in the value of t. N. B. The equation for the binary call options theta can be found at the bottom of the page. Figure 1 shows binary call option price profiles at different times to expiry. Figure 2 shows how with. Options Trading: Understanding Option Prices. Binary call option value. The binary call options on the S&P Index futures contracts stipulate that the investor would receive $ if the futures close above 2,, but nothing if it closes below. The investor purchases one Exchange-traded binary options have transparent pricing and no counter-party risk, unlike those traded over-the-counter. Find the PDE followed by the price of this derivative. Write the appropriate boundary conditions. The boundary conditions should be: Ie the drift of discounted stock should be 0. This can help you find the correct mu. In this case the pde is the same as the black scholes pde using your risk neutral process. Can you think of why this is? Does the type of call option change how the underlying changes? Take a look at dirichlet also known as zero gamma condition and other types of boundary conditions.

That is the right start, but what is the expectation? Plug this into your formula. The problem is that this expectation is in real probability space and you want it in your risk neutral space. You can use girsanov's theorem. Best proof result to use I found is 1 in http: By posting your answer, you agree to the privacy policy and terms of service. Questions Tags Users Badges Unanswered. Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. Join them it only takes a minute: Here's how it works: Anybody can ask a question Anybody can answer The best answers are voted up and rise to the top. I'm stuck with one homework problem here: Here is what I came up with by now: I don't know how to start here. Can anybody help me and solve this with me? Dec 20 '12 at You did not convert correctly from real probability measure to risk neutral probability measure. As of writing this comment it seems as if there is a type in your first paragraph.

Yes you are definitely right sorry about that. Sign up or log in Sign up using Google. Sign up using Facebook. Sign up using Email and Password. Post as a guest Name. Binary Option. A binary option (also known as all-or-nothing option) is a financial contract that entitles its holder to a fixed payoff when the event triggering the payoff occurs or zero payoff when no such event occurs. Possible payoff of a traditional option ranges from zero to some upper limit (or infinity) and it depends on the actual difference between the exercise price and the price of the underlying asset. Payoff of a binary option on the other hand, is just a fixed amount which is not affected by the difference between the exercise price and the price of the underlying asset. A binary option depends on the relationship between the exercise price and the price of the underlying asset only to determine whether the payoff will occur or not. It is also called digital option because its payoff is just like binary signals: i. e. 0 or 1 where 1 being the maximum payoff.

A binary call option pays 1 unit when the price of the underlying (asset) is greater than or equal to the exercise price and zero when it is otherwise. This is expressed by the following formula: Binary Call Option Payoff = 1 , Underlying's Price &ge Exercise Price 0 , Exercise Price < Underlying's Price. A binary option payoff is exactly the opposite of a binary call option, as expressed by the following formula: Binary Call Option Payoff = 1 , Underlying's Price &ge Exercise Price 0 , Exercise Price < Underlying's Price. Keita Yoshihara is a trader at Foundation Investments. On 1 June 20Y3, he bought 1,000 CBOE binary call options on S&P 500 (SPX) with exercise price of 1,650. The options carry a $100 multiplier and are due to expire on 20 July 20X3. Find per-option and total payoff if exercise-settlement value (SET) of S&P 500 index is 1,690 at the day before expiration date. What if the SET is 1,600? SPX is a binary call option which means it will pay $100 if the exercise-settlement value (SET) (which is the price of the underlying asset &mdash the S&P 500 index) is equal to or greater than the exercise price and zero if the SET is lower than the exercise price. In the first scenario since SET is higher than the exercise price (1,690 > 1,650), it will trigger the payoff which equals the option multiplier and Keita will receive $100 per option and $100 thousand in total = 1,000 × $100.

In the second scenario where SET is 1,600, payoff will be zero because the condition required to trigger payoff is not fulfilled i. e. the SET (1,600) is not greater than or equal to the exercise price of (1,650). In this scenario Keita will have to let the options expire wothless. Copyright © 2015 XplainD | All Rights Reserved. What are Binary Options? Binary Options Trading. Binary Option Example. Definition of Binary Options: Binary Options are like regular options in that they allow you to make a bet as to the future price of a stock. However, binary options are different in that if the "strike price" is met by the expiration date, the binary option has a fixed payoff of $100 per contract. It doesn't matter if the stock price is a penny over the "strike price" or if it is $100 over the strike price, they payoff from the binary option is the same--$100. They are called binary options for this very reason. Binary means "2" and binary options have only 2 possible payoffs--all or nothing ($100 or $0). In 2008 the AMEX (American Stock Exchange) and the CBOE started trading binary options on a few stocks and a few indices trading binary options is NOT available on very many stocks or indices just yet. The United States has been slow to accept binary option trading, but binary option trading has been quite popular in Europe for a few years, especially as they relate to FOREX. The best way to understand these relatively new type of securities is to look at the example below. Example of a "Binary Option" Suppose GOOG is at $590 a share and you believe GOOG will close at or above $600 this week.

You could buy 5 GOOG Binary Options for a price of, say, $0.30. The multiplier on the binary options is also 100 so five of these options would cost 5 contracts x $0.30 * 100 multiplier=$150. If GOOG closes at $600 or higher by the expiration date then the binary option is worth $100 so five of these GOOG call options would be worth $500, for a profit of $350. It doesn't matter if GOOG closed at $600 or $650, the binary option is still worth $100. If GOOG closes at $599.99 or lower, then the option expires worthless. Currently, all binary options are traded as European style, which means they can only be exercised or settled at expiration. In the U. S., the CBOE offers binary contracts on 2 indices, the SandP 500 Index (SPX) and the CBOE Volatility Index (VIX). The tickers for these binary contracts are BSZ and BVZ. If you want to trade them, there are not many popular brokers that have added them to their platform. The ETRADEs, TD Ameritrades, Schwabs, and Scottrades have not added them to their platform yet. If you follow some of the ads on the web, the brokers that trade them are not commonly known so there is great risk. Another Example of Binary Options: Unlike traditional calls and puts, binary options do not have set prices. The binary options trader decides the amount of money he wants to bet and invests that amount when he buys the binary option. If the price is $0.25 then he stands to make $0.75 if the underlying moves as much as the investor hopes. The time of expiration for binary options is set at different time intervals throughout the day, such as expirations of 1 hour, 1 day, 1 month, etc.

The short duration of these contracts makes them more attractive to speculators and risk takers. Here are the top 10 option concepts you should understand before making your first real trade: Options Resources and Links. Options trade on the Chicago Board of Options Exchange and the prices are reported by the Option Pricing Reporting Authority (OPRA): Binary Option Trading Example. Trading with Binary Options seems to be very simple. Even without experience it’s possible to understand the basics within a few minutes. When you still need to know these basics we recommend to take a look at our trading section here. In this article, we will show you step by step how to trade with binary options at 24option. Simple HighLow option. A HighLow option is the fundamental of option trading. You can either select “high” when you think the price of the underlying asset will be higher than the current price at the expiration date or select “low” when you think it will be lower. That’s an overview for a typical EURUSD HighLow option: Let’s take a look at the left column: The “question” you should answer is whether the currency pair EURUSD will close over or below (high or low) 1.26868 at 20:45 when the option expires. When you’re buying a call-option you bet that the price will be over 1.26868 at 20:45. So in case it is 1.26869, you will make a profit. When you buy a put option you will make profit when it’s 1.26867 or lower. You don’t have to know the exact price at the expiration date.

The only thing you need to know is whether the price is higher or lower. Once you have made your decision, you can type in the amount you want to bet: The gray horizontal line indicates the current price. You will see the trend for the last 30 minutes. The red vertical line indicates the expiration date, in this case 20:45. The countdown on the left shows when the opportunity to trade this option will end. This is not a countdown for the expiration date (in most cases). It just shows when the option you currently selected won’t be available any more. There are 60 second options at 24Option as well and you better be quick in this case. 60 seconds is not a long time and you have to trade quickly. IQ Option is one of the most reliable and secure brokers and a safe haven for all traders. This broker is regulated by and offers options for as low as $1, plenty of stock options and a great trading platform! Binary Put Option Explained. The binary options trader buys a basic binary put option if he is bearish on the underlying in the very near term. This basic binary put option is also known as the common "High-Low" binary put option.

By purchasing a basic binary put option, the trader is simply speculating that the price of the underlying asset will be lower than the current market price when the option expires, typically within next few minutes or several hours. It is entirely up to the trader how much he wishes to invest with each purchase of the binary put option. The minimum and maximum he can invest in each put option varies across brokerages. If the price of the underlying is below the strike price of the binary put option, the option expires in the money and the trader stands to receive a payout. Otherwise, the option expires out of the money and he loses his initial investment. In the rare event where the price of the underlying asset is exactly the same as the strike price, the option expires at-the-money and the trader will simply get back his original investment. If the binary put option expires in the money, the trader receives a profit which is equal to the payout% multiplied by the initial investment. If the option expires out of the money, the trader loses his initial investment. This is also the maximum he can lose in this trade. Binary Put Option Example. A binary options brokerage is offering 85% payout for the binary put option on EURUSD which is currently trading at $1.30. After tracking the price movement of EURUSD for the past hour, the binary option trader believes that the price will drop over the next 5 minutes and decides to invest $100 to purchase a binary call option on EURUSD expiring in the next 5 minutes. If EURUSD goes down to $1.29 five minutes later, the investment pays off and the traders earns a profit of 85% of his initial investment, which is $85. However, if the price of EURUSD rises to say $1.31 instead, the trader will have lost his initial investment of $100. Note that it does not matter whether the price of EURUSD flash crashed below $1.00 or skyrocketed up to $1.40, both the profit and loss will be fixed at $85 and $100 respectively. If the binary options trader is bullish on the underlying price, he or she can buy a binary call option instead.

Continue Reading. What are the Main Types of Binary Options? Learn how the One-Touch, No-Touch and RangeBoundary binary options differ from the common high-low viety and how to trade them. Read on. What Assets can be Traded using Binary Options? Many of the most popular financial instruments such as currency pairs, equities and commodities are available to trade using binary options. . Read on. Binary Options: Trading or Gambling? Is binary option a legitimate financial instrument or just another form of gambling. Read on. Binary Options & Trading Robots: A Perfect Match? Unlike humans, robots have no emotion and do not need to rest, so they can make a lot more trades than humanly possible, combined with perfect consistency. Read on. Is Binary Options Trading a Scam? Learn how you can get scammed when trading binary options if you are not careful.

Read on. How to Select a Binary Options Broker? With so many scam brokers out there, before you learn how to trade, one must know how to separate the wheat from the chaff and find a trustworthy binary options brokerage. Read on. Binary Options: Calculating Breakeven Win-Rate for a Given Payout. How often does my trades need to be successful in order to be consistently profitable in the long run when trading binary options. Read on. Follow Us on Facebook to Get Daily Strategies & Tips! Binary Options Basics. Main Types of Binary Options. Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide. com shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon. The financial products offered by the company carry a high level of risk and can result in the loss of all your funds.

You should never invest money that you cannot afford to lose. Binary Option. What is a 'Binary Option' A binary option, or asset-or-nothing option, is type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. The success of a binary option is thus based on a yes or no proposition, hence “binary”. A binary option automatically exercises, meaning the option holder does not have the choice to buy or sell the underlying asset. BREAKING DOWN 'Binary Option' Difference Between Binary and Plain Vanilla Options. Binary options are significantly different from vanilla options. Plain vanilla options are a normal type of option that does not include any special features. A plain vanilla option gives the holder the right to buy or sell an underlying asset at a specified price on the expiration date, which is also known as a plain vanilla European option. While a binary option has special features and conditions, as stated previously. Binary options are occasionally traded on platforms regulated by the Securities and Exchange Commission (SEC) and other regulatory agencies, but are most likely traded over the Internet on platforms existing outside of regulations. Because these platforms operate outside of regulations, investors are at greater risk of fraud.

Conversely, vanilla options are typically regulated and traded on major exchanges. For example, a binary options trading platform may require the investor to deposit a sum of money to purchase the option. If the option expires out-of-the-money, meaning the investor chose the wrong proposition, the trading platform may take the entire sum of deposited money with no refund provided. Binary Option Real World Example. Assume the futures contracts on the Standard & Poor's 500 Index (S&P 500) is trading at 2,050.50. An investor is bullish and feels that the economic data being released at 8:30 am will push the futures contracts above 2,060 by the close of the current trading day. The binary call options on the S&P 500 Index futures contracts stipulate that the investor would receive $100 if the futures close above 2,060, but nothing if it closes below. The investor purchases one binary call option for $50. Therefore, if the futures close above 2,060, the investor would have a profit of $50, or $100 - $50. How to Understand Binary Options. A binary option, sometimes called a digital option, is a type of option in which the trader takes a yes or no position on the price of a stock or other asset, such as ETFs or currencies, and the resulting payoff is all or nothing. Because of this characteristic, binary options can be easier to understand and trade than traditional options. Method One of Three: Understanding the Necessary Terms Edit. Trading Binary Options Edit.

Method Three of Three: Understanding Costs and Where to Buy Edit. No, there is no insurance on trades. The closest you could come is to hedge your investments by putting money into a counterbalancing investment that would go up when your original investment goes down. There are a wide range of binary option online trading sites: 24options, EZTrader, and IQ Options, to name a few. Be sure to read the terms and conditions before you decide to trade with a site. It is not impossible, but neither is it very likely. Trading binary options involves little more than luck at hyper-speed. So how lucky do you feel? You're as likely to lose money in binary options as you are to make it. No, you won't lose the money invested. If you win, you would get your return, which is the sum of any profit and the money invested. There is no fee in the usual sense, but brokers take your money, nonetheless. There are various ways brokers can manipulate trades so that they will reap rewards, and none of the ways benefit traders.

Go to 7BinaryOptions. com and click on "Brokers" for reviews on many binary options brokers. See the wikiHow article, Trade Binary Options. Warnings Edit. Related wikiHows Edit. Understand Carbon Trading. Invest in the Stock Market. Open a Roth IRA Account. Calculate Implicit Interest Rate. Get Started Trading Options. Discount Cash Flow. Invest Small Amounts of Money Wisely.

This version of How to Understand Binary Options was reviewed by Michael R. Lewis on March 11, 2017. Understanding Binary Options Payouts. Binary options payouts are the earnings that a trader gets by investing on winning trades in the binary options market. How are Payouts Calculated? Most binary options platforms usually indicate the percentage that a winning trade will attract. The payout is then a sum of this profit percentage and the investment amount. For instance, if a trader invests $100 into a trade with a 75% winning stake, then the payout for this trade if it ends in the money is $100 + (75% of $100) = $175. So the payout for this trade is $175. Payouts Between Trade Contracts. Different binary options contracts have different payout rates. Generally, most binary option contracts pay between 65% and 90% on trades. There are some brokers that offer the opportunity to get a refund of the invested capital if the trade ends up a loser. This percentage refund is now subtracted from the invested amount, and will affect the eventual payout.

A trader may opt not to accept the refund. So when setting such a trade, a trader may opt for a full payout possibility (e. g. 80:10 or 80% profit, 10% refund for a 90% profit trade) or get the payout in full (90:0 or 90% profit, 0% refund). Some contracts such as the High Yield options (High Yield Touch on SpotOption platforms or High Yield Boundary on Tech Financials platforms) offer payouts of up to 500%. The exact payout for a trade differs from one broker to the other. What Payouts Do you Go For? In the binary options market, traders are sometimes caught in between trying to hit sone big major payout, and aiming for several of the smaller payouts. One way to open your eyes as to what payouts you should be gunning for is to use a very easy illustration, a little Mathematics and the rest is up to you. Let us take the case of a Trader JB, who is on a binary options platform that offers a run bet. This run bet aims to pay the trader 10 times his investment if he is able to predict that the last number of the price within the next five ticks of the asset he is trading will end in the number 5. He has no method in place to determine that the price of the asset will get to his desired goal, but he has a hunch that since the price of the asset being traded is 1.2899, and 9 is closer to 5, mother luck may just smile on him. He decides to invest $100 in order to get a huge payday of $1,000.

Smart guy eh? There is another trader named Trader Jane, who is also on the same platform. However, she decides that the run bet is just too risky for her, and she decides to trade a TouchNo Touch trade on the same platform that offers an 80% payout. She also decides to invest $100 into her trade, knowing that her payout will be $180 (capital + profit). Her trade tool is using a chart pattern that shows a continuation of the price of the asset in the chosen direction. The question is: which of these two traders is most likely to get to their goal? To answer this question, let us look at the odds of the market in each trader’s favour. Remember this is the fixed odds market, right? Trader JB is betting on the next five ticks landing on his chosen number out of 0 to 9. This is a 1 in 10 chance of getting the bet right, or a 10% chance of profiting from this trade. Odds of losing: 9: 1. Trader Jane is betting on the price of the asset touching a strike price, and she has a method to pull this off. She may or may not get to this target, so her odds are 50:50. The fact is that 98% of traders who play the run bets eventually lose all their money. Even if they make it once or twice, they are drawn by the allure and then luck runs out on them. Part of the problem is that there is no way to monitor the pricing of the asset to see if the brokers manipulate this, so invariably, losses will occur. I am yet to meet a single trader claiming to be a winner with the run bets.

Besides, 10% out of 100 in any test is always a failing grade. On the other hand, a TouchNo Touch trade can be played with a method. All the trader needs is a touch on the strike, and if you have been following our blog, you will see countless strategies that we have used to illustrate how to win this bet type. Besides, a score of 50 out of 100 may not be that high, but it is a pass in any test. Lesson: It is better to aim for lower payouts with surer trades, than to aim for high payouts with less certainty in the trade result. Options, Futures, Derivatives & Commodity Trading. Continuing further from our previous article on Binary Options Example Explained, here we present the Payoff Functions of Binary Options. Different Types of Binary Options. There can be several types of Binary Options - depending upon the payoff functions profit and loss regions. The same binary option may look different from a BUYER's perspective and completely different from a SELLER's perspective. For e. g. the above payoff function was constructed from a buyer's side. The same payoff function when constructed from a seller's side will look like the following: The RED payoff function for Binary Options is without the price being considered from seller's perspective.

If the underlying stock price remains below $50, then seller looses nothing. But if it goes above $50, he has to pay $40 to the buyer. The $50 is the strike price of the binary call option. The GREEN payoff function for Binary Option is with price of $10 taken into consideration. If the underlying stock price remains below $50, the seller looses nothing. In fact he is in profit of $10 which he received earlier and he keeps that as a profit. But if the stock price goes above strike price of $50, then he ends up in a loss of $30 ($40 to be paid to the buyer minus $10 he received upfront). Payoff Functions of Binary Options. One more important thing to note about the above 2 cases of Long and Short Binary Options is that the all or nothing regions extend to the end points. For e. g., in case of Long Binary Option, the profit region (All) is above $50 to infinity, while the loss region (Nothing) is from $0 to $50. Vice Versa for the Short Binary Option case. These kind of limited range binary options are also called as Binary Options Tunnels.

Here is an example payoff function of such a Binary Option: RED colored graph - without price taken into consideration. YELLOW colored graph - price of $10 taken into consideration. In this case, The buyer is paying $10 to buy this Binary option. If the underlying stock price remains between $35 and $65, the buyer of the Binary Option will get $40 (Net $30 = $40 - $10). But if the underlying stock price remains below $35 (between 0 and $35) or goes above $65, then he gets nothing (Loss of $10). In case of binary option tunnel, there are 2 strike prices. In the above example, the 2 strike prices are $35 and $65. For e. g., say there is a binary option which gives opportunity to the option buyer to receive $40 if the underlying stock price remains below $35 and receive nothing if option price goes above $35. Here is the payoff function for such Long binary option (Buyer's side - assuming he paid $10 to buy this Binary Option): And here is the same binary option payoff function from the seller's side (he receives $10 for selling the Binary option):