A binary option (also known as an all or nothing option) is an option where a fixed payout is made under conditions defined in the option's contract. These conditions can be formed by one or two American or European Barriers.

If the barriers are American they can be touched at any time during the option's life.

If the barriers are European the spot level at the expiry date is followed to The fixed payout is made on the option's delivery date in the base currency, and is based on whether the option is on the money or not, not by how much it is in the money.

Since binary options have discontinous payoffs, trading on those options are generaly considerad as gambling. On the other hand binary options which are also called digital options can be very useful for diversification of payoffs in a portfolio. 

Binary options are also used mostly in the design of capital guaranteed structured notes. The interest gain from the capital is used in order to buy a binary option. When the maturity expires customer receives his main capital and the payoff of the binary option.