Investing

Binary Options Education

Apr 16, 2018
Binary Options Education

Binary options have been around for a very long time, it is now 2018 and every 6th message on Quora is still for IQ binary options, questions such as Is IQ Option a scam or a trustworthy broker? pop up daily.

Lets take a few steps back, what is binary options trading and how does it work?

Binary Options Defined:

There is usually a proposition, such as stock A will rise and a time constraint, which might be 2 hours.

Secondly, binary options are binary, which is to say there are two possible outcomes – in this case it’s a win or lose type deal.

Thirdly, the pay-out if you win is fixed – you know how much you could win before you take the bet.

How do Binary Options work?

An example might be “Alphabet stock will rise to 1,050.00 by 2pm” and the binary result is either yes or no. If no, the money “invested” is lost, and if yes, a fixed pay-out will be deposited to your options trading account.

Options from Brokers, not Exchanges

This is a very important distinction, when exchanges set the prices of options the price can change on expected outcomes. This means you pay less when the odds of winning are smaller, and more when the odds of winning are higher, which offers a degree of protection when compared to broker based binary options trading. There is further regulatory oversight with these options as governed by the CFTC.

Whereas if a broker sets the price, then the broker is more than likely to stack the odds in its favour, there is clearly a strong conflict of interest here that brokers exploit to make as much money as they can. The real problem in the options market is that these brokers provide what are little more than bets touted as investments which are often highly skewed in the brokers favour. Professional investors won’t touch them, they exist primarily off new traders who are unable to understand the risk vs reward of making these bets. I would draw parallels here to a casino, those who run casinos will deliberately skew the odds in the casinos favour to as much as an extent as they feel they can get away.

The Facts:

74% of Binary Options Traders Lose Money

The pay-out ratio of 95% implies an average loss of £5 for each £100 in bets

This is based on Japanese statistics published in 2013 (which are publicly reported due to Japans regulatory oversight). Learn more about these statistics at Finance Magnates.

To conclude:

Binary options are often based on very short time horizons - I.e. APPL stock will rise within 2h, it is therefore gambling pure and simple. It is considered a scam by city traders.

Regulation will likely catch up to stop these being sold as investments and treated as what they are - bets.

Learn more about options at Investopedia & Wikipedia.