We propose a new method of digital watermarking with double binary optical phase encoding technique. Design procedures base on iterative Fourier transform algorithm (IFTA). The combination of two binary phase structures, in which one is used to encode the hidden image, and the other as encryption phase key, is inserted as watermark into the host image. The affections of phase levels of binary phase holograms on the quality of extracting watermark from the watermarked image have been analyzed, and results show that the 2/2 phase level combination is the best scheme of watermarking than other multiple combinations. The principle of encrypting the private key has been presented. This method can effectively increase the security of digital hologram watermarking and support the hard output of the watermarked image. The watermark is robust against hard output. We analysis the influence on the quality of extracted image after the processing of printing and scanning. We also develop the software tool for the watermarking process. The experimental results are given.© (2005) COPYRIGHT SPIE--The International Society for Optical Engineering. Downloading of the abstract is permitted for personal use only.