As the name implies, a binary option is an all or nothing security that pays off a fixed cash settlement amount if the underlying settles at or above a specified strike price at expiration. If the underlying settles below the specified strike price, the binary option will expire worthless. If you are familiar with Intrade.com, then you are already familiar with binary options.
In the case of VIX binary options, these are European style (no early exercise) options, currently consisting only of calls (no puts are available), and settled in cash. The CBOE specifies the settlement as follows:
"The exercise-settlement value for VIX Binary Options will be the same as the exercise-settlement value ("VRO") for CBOE Volatility Index Options. VRO is a Special Opening Quotation (SOQ) of VIX calculated from the sequence of opening prices of the options used to calculate the index on the settlement date. The opening price for any series in which there is no trade shall be the average of that option's bid price and ask price as determined at the opening of trading. Exercise will result in delivery of cash on the business day following expiration.
The exercise-settlement amount for VIX Binary Call Options will be 1) $100, if VRO is equal to or greater than the VIX Binary Call Option strike price; or 2) $0, if VRO is less than the VIX Binary Call Option strike price."
I checked with my two favorite options brokers, thinkorswim and optionsXpress, to determine the availability of VIX binary options. thinkorswim has not yet implemented VIX binary options, but is “working on adding them.” optionsXpress does have VIX binary options available to trade. To access the optionsXpress VIX binary options chain, just pull up the chain for options on VRO (the VIX special opening quotation ticker).
A graphic of the current optionsXpress VIX binary option chain is below. As you can see, volume and open interest are negligible at this stage, which has translated into bid-ask spreads generally in the 0.06 – 0.10 range. For the month of August, the 22,162 VIX binary options contracts traded accounted for 1.8% of all VIX call options and 1.1% of all VIX options transactions.
For additional information, check out the VIX binary contract specifications at the CBOE’s web site.