The asset or underlying asset of any derivatives contract is what the contract is based on. The price movement of the underlying market impacts the derivative. A stock index binary option is a derivative based on a stock index futures contract. When the futures price moves it impacts the price of the binary option. The stock index futures contract is itself a derivative. It reflects the future expected price of a cash stock index.
Sometimes underlying assets and their derivatives are traded on the same exchange. In other cases they are traded in different locations. Either way, when the derivatives contract expires, the price settlement process uses the price of the underlying asset as the basis for the calculation.
For example, the Nadex US 500 binary option is a derivative of the CME E-mini S&P 500® futures contract, which is its underlying asset. A US500 binary option’s price changes based on the movement of the E-mini S&P relative to various binary strike levels. When a Nadex binary contract expires, the settlement of the contract is determined by using a sample set of the final trade prices of the underlying using a calculation approved and regulated by the CFTC. Binary options providers that are not CFTC-regulated may not use a reliable calculation to settle the contract.« Back to Glossary Index