If you choose to be a binary buyer, at expiration, you are predicting that the underlying price will be trading higher than the particular binary strike price level. If you are correct at expiration, you will receive $100 per contract, exchange fees not included.
If you buy a binary strike that is above the underlying market price, you are buying an OTM binary. At expiration, the underlying market price has to be trading above the strike in order for the binary buyer to receive the settlement payout.
When initiating a trade, the bigger this trade disadvantage for the binary buyer, is a result of the underlying market price farther below the binary strike level. The price of a binary will always be between 0 and 100.
To transition this binary trade disadvantage with the binary pricing, the binary buyer will have a cheaper initial cost or a lower binary trade price in that 0 to 100 price range. For the binary buyer, the initial trade cost is based on the binary trade price
Two binary strikes are shown below for the USD/JPY. The underlying is currently trading at 107.380.
USD/JPY>108.00 offer price is 12.25
USD/JPY>107.60 offer price is 35.00
For the USD/JPY>108.00, the difference between the strike and underlying trading price is 62 pips. For this contract to be profitable, the USD/JPY market would have to move over 62 pips at expiration. This is a big disadvantage when compared to the 107.60 strike. However the initial cost for the binary buyer is $12.25 per contract which is a 716% return if the binary finishes in the money at expiration.
The USD/JPY>107.60 strike has less of an initial trade disadvantage. The difference between the 107.60 strike and the currently underlying price is only 22 pips below the strike. To receive full profit at settlement, the USD/JPY would only have to rally more than 22 pips. But notice this strike is priced higher as this strike has less of a disadvantage to the OTM binary buyer as there is not as much movement needed in order to be profitable. Here the initial cost for the binary buyer is $35.00 per contract which is a 186% return if the binary finishes in the money at expiration.
Note there are many strike levels and duration’s to choose from the binary option chain but remember it is the underlying market bias as to the root of your trade decision.
(Exchange fees not included in calculations)