We propose a new method of digital watermarking with the double binary optical phase encoding technique. The iterative Fourier transform algorithm (IFTA) is used to generate the binary phase structures. The combination of two binary phase structures, in which one is used to encode the hidden image and the other is used as the encryption phase key, is inserted as a watermark into the host image. The effects of phase levels of binary phase holograms on the quality of extracted image are analyzed, and the results show that the 2/2 phase level combination is a better scheme for watermarking than other multiple combinations. We also present the principle of the encrypting key. Both analysis and experimental results illustrate that this technique is of high security and robust against the printing and scanning process. © 2005 Society of Photo-Optical Instrumentation Engineers.