Binary options are a financial market trading instrument involving limited los and limited profit. It is designed so that the trader gets a fixed amount when the option expires in the money. However, the trader will get nothing if the option is out of money during expiry. Therefore, it is named ‘binary.’ It is either a ‘yes’ or ‘no’ proposition.
The key aspect about binary options that traders need to be aware of us that there are no commissions to trade binary options. This is because binary options offer a reduced payout relative to the initial bet.
Meaning, if you risk $100 on any given binary options trade, the most you can possibly make (depending on your broker) is anywhere from $80 to $92. The amount you make is determined by your binary options brokers “payout” which is commonly around 85%.
What’s up with all the fraud?
Binary options have become synonymous with fraud throughout the years. This is primarily because of the negative payout associated with all forms of binary options. Binary options brokers have a history of fleecing money from their clients via rigged trading platforms, poor odds, and the refusal to return deposited funds.
Stock option brokers in the US and Europe are all regulated by the SEC and the ESMA, binary options brokers are often not regulated by any governing body. Occasionally, some of the larger binary options firms will boast about regulations from CySEC, which is a market regulatory agency based in Cyprus.
The bottom line is that binary options brokers don’t have to be “fraudulent” to come out ahead and make money from every single client. All they have to do is offer negative payouts for a 50/50 proposition and they will mathematically come out ahead in the long run.
A good analogy is a roulette table in the casino. A gambler could continuously place $100 on black all night long and, one would assume that the gambler would more or less come out even after enough spins.
However, this is not the case, because every roulette table has something known as “0” and “double 0, or 00.” If the ball lands on any of the green single or double zeros, the gambler will lose their $100 wager. This brings the probabilities of winning to somewhere around 47%, as opposed to 50%.
This is all the casino needs to be profitable. Similarly, with binary options, all a broker needs is a 92% payout to be profitable from the majority of their clients. And guess what…the binary options business model works. Although nobody actually knows how big the industry is, it’s estimated to bring in billions of dollars every years from millions of clients across the globe.
So do people make money with binary options?
Of course. People make money with roulette, too. The key is that it’s virtually impossible to consistently make money with either form of betting because the odds are terrible. This is not to say that nobody in the history of binary options has gotten very lucky over a long period of time. There definitely have been binary options traders who have made a lot of money, but there are definitely more who have lost a lot of money.
Nevertheless, if you’re looking to enter the world of binary options, the most important thing you can do to improve your chances of success is to use a trusted, highly well-reviewed, and regulated broker.
If you deposit money with an unscrupulous broker who’s only intention is to syphon money from your credit card, you’re going to be facing an uphill battle from the start. Before you risk a single penny with binary options, you need to be fully aware of the risks.
As a final word, ponder this: there’s a reason why professional traders, institutional money managers, and hedge funds don’t trade binary options…