You may have seen an influx on personal finance blog about binary options lately and wondered exactly what they are.

Binary options are a way to trade the price fluctuations in domestic and global markets.

Yup. That does totally sound like gibberish.

But here’s the deal – if you travel kind of often, you know that currencies fluctuate and this is sort of like that. For example, a few years ago, it was in the news when the Canadian dollar actually became worth more than the American dollar. That’s a pretty rare occurrence. It’s usually worth 70 to 80 cents of an American dollar.

Binary options would allow you to essentially predict whether the Canadian dollar, or even crypto-currencies like the bitcoin, will go up or down by a set time.

There is usually a “strike price” – which is often the current price. So if the Canadian dollar is worth .77 cents on one American dollar today, that might be the “strike price.” If you think their dollar will be worth more, you’d purchase a “call.” If you think it will be worth less, you’d purchase a “put.” To make money, if you purchase a call, you’d need the amount to be above the strike price. If you purchased a put, you’d need the amount to be below the strike price.

Now binary options are based on lots of different things (though they can include currency). Another example would be placing a binary option on Dunkin Donuts stock. You may think Dunkin Donuts stock will go up in the next 30 minutes. If it’s currently at 44, you’d place a call on the Dunkin Donuts stock at a strike price of 44 with an expiry in 30 minutes.

The option will also set the percentage that you can gain. Payouts can vary from 50-500% if you are correct, but you will lose 100% of your investment if you are not.

This can look a little complicated because of exactly how the options are bought. Going back to Dunkin Donuts – a trader may list that you can offer $33 for it to go up from its current set price. So for $33 you can buy in. If it does go up within the set time frame, you now get $100. So $100 minus the initial $33 buy is a $77 net increase. However, if you’re wrong, you lose the entire investment of $33.

On the positive side, this boils down your investment question to will the item go up or down in the very near future. Since you never actually hold the stock, none of the regular risks of stock ownership apply

On the negative sid.e, it can be a bit like roulette. The time frames are often quite short, so it’s unlikely you’d be able to do any real research that would benefit you.

That being said binary options are still a legal trading option.