A binary option is a financial product that pays out all-or-nothing based on a pre-set list of criteria. They are in contrast to traditional options that tend to pay out a scalar value. Kalshi contracts tend to be binary options, whereas traditional oil and wheat options are not.
Consider the following example of a contract that pays out $1 if the price of oil is above $100/barrel on May 1 and pays out $0 if not. That is a binary option since there are only two outcomes: $1 or $0. In contrast, a traditional American option on the price of oil on May 1 would pay out whatever the price is on May 1. If the price is $95, you get $95. If the price is $105, you get $105.
The advantage of binary options is their prices can be easily interpreted as probabilities. In the above example, if the binary oil contract is trading at 60 cents/contract, then one can say that the probability that the price of a barrel of oil will be above $100 on May 1 is 60%. However, they are also much more volatile–you can lose all the money you put in if the price does not reach $100. Binary options are thus less attractive to those who are seeking safe returns, but are more attractive to those with strong directional predictions who do not want to take out leverage (because you have a lot higher monetary upside in more volatile markets without using leverage, with the caveat that the downside risk is much greater). Traditional, non-binary options do not have this interpretatibility.
Options, including binary options, generally are priced based on a combination of expected price and expected volatility. Suppose you think that the price of oil will be $95 with a standard deviation of $1. In that case, an option that pays off if the price of a barrel of oil will be above $100 is nearly useless, there would have to be a 5 SD event which occurs nearly 0% of the time. In contrast, if you think the price of oil will be $90 with a standard deviation of $10, then the probability that the price of oil will be above $100 is 30%. Thus even though the expected price was lower, the value of the option has risen. In the latter case, a fair value price of the binary contract would be roughly 30c.
Binary options also have the advantage of being able to be used for non-numerical events. Suppose you want to have a contract that pays out if Congress fails to pass an appropriations bill, triggering a government shutdown. Since either a shutdown occurs or does not occur (it’s a binary outcome), the best way to structure such a contract is using a binary option.