Binary Option

A binary option has only two outcomes, which is what makes it simultaneously a derivative and something that looks a great deal like a bet. The buyer pays a price between zero and the full settlement amount, and at expiry receives either the full amount or nothing. Because the price sits between those bounds, it reads directly as a probability: a contract settling at $1.00 trading at $0.35 implies a 35% chance.

That dual character is the whole regulatory argument in American prediction markets. Listed on a designated contract market and cleared through a derivatives clearing organisation, a binary option is a federally regulated instrument supervised by the CFTC. Offered by a sportsbook on the same underlying event, the identical economic exposure is state-regulated gambling with different tax, advertising and player-protection obligations. Several state regulators have argued the substance should govern; the exchanges argue the venue and the instrument do. The distinction also has history: binary options were for years a byword for retail fraud offered from offshore platforms, and both the CFTC and the FBI ran public warning campaigns about them, which is part of why the term carries baggage that the exchanges themselves tend to avoid using.