Everywhere you turn online, there is this ad and that other ad enticing the readers to Binary Option Trading.
The promise is usually centered around how easy it is with sales pitch such as “work for one hour a day and make $10,000”.
But what is the potential for those who embark in this activity.
In this article, we will scrutinize the lure behind this rising hype.
Binary Option Trading: What Is It ?
Binary Option Trading consists of correctly guessing the future outcome of a scenario.
The “Binary” in the name comes from the fact that one must choose from just two outcomes: yes or no.
In financial trading, the scenario is whether the price of the underlying asset will be above of below a certain threshold (price) at a convened future date.
Such examples of scenario are:
- Gold above $1500 at 1:15 PM when the market closes ?
- Crude Oil WTI above $57 at 16:00 ?
- USD/YEN (US Dollar vs. Japanese Yen) be above $1.30 in 60 Mins ?
Multiple assets are available for trading ranging from forex pairs, indices, stocks, commodities and even crypto.
The value of the Binary Option fluctuate between a Bid and Ask price that can be quite distant apart.
As for the expiry time, it can be anything between a few seconds to a few months.
So in principle, one can understand why it appears so simple: just like flipping a coin.
Very little effort is required, the settlement time can be within an hour so really what’s not to LIKE ?
Online Binary Option Trading: How Does It Really Work?
There are two main types of Binary options.
- Cash-or-nothing Binary Options: Pays a predetermined amount of Cash in case of win (known as in-the-momey)
- Asset-or-nothing Binary Options: the payout is the value of the asset
The other terms used to name these Binary Options are often: all-or-nothing Options, digital options or Fixed Return Options (FROs on the American Stock Exchange).
If the trader believes that the price of the asset will go above the suggested price, he/she buys a call option, instead, if the trader believes the price will drop below, he/she buys a put option.
In the US exchanges, the maximum payout per one option is capped to $100.
This implies that the buy price of the Binary Options is always below $100.
How close it is to $100 is proportional to the probability of being in the money.
The trader can close their position at any time before the expiration.
At the time a trader buys the Binary Option, the payout percentage is already known.
Let’s articulate this true an example.
Trader Joe thinks that Crude Oil WTI will go above $57 by whatever expiration and there buys one Binary Option Call for $50.
The payout in this scenario is: ($100 -$50) = $50 divided by the initial buy price of $50 which is 100%.
Online Binary Options Industry
Unlike the above US exchanges, online brokers do not have a dollar limit amount on Binary Option payout.
Online brokers sell Binary Options at a fixed price (example $100).
They define the payout as a percentage. The trader knows this information before placing the trade.
That number can be anywhere between 60% and 100%.
This industry has gotten the bad eye from many jurisdictions across the globe due to lack of regulations.
What Do You Need (To Do) To Get An Edge ?
Binary Options are often associated to a “guessing game” at best or Gambling at worst.
Companies involved in international transactions are prime candidates to use forex Binary Options.
For instance, a US companies selling goods to a European customer with future payments in dollars.
Such companies can protect their revenue from the EU partners by taking binary options trades on the EUR/USD pair.
Oil companies are another examples I can think of to benefit from since Oil is “indexed” on the US dollar.
The regular retail traders can take their market knowledge to find a regulated broker.
They can also use sophisticated tools for technical and fundamental analysis along with trading methodology.
However, they will always come second to the main beneficiaries: the brokerage firms they are trading against.
Let’s illustrate this with this example.
- An online Binary Options firm pays $75 for each successful $100 trade (75% payout)
- Said online Binary Options even gives back $10 on each losing $100 trade
- Assume, the trader makes 1000 trades and wins 545 of them and 455 are losses
- The Profit from the 545 winning trades is: 545 x ($75) = $40875
- The Loss from the 455 losing trades is: 455 x ($100 – $10) = 455 x ($90) = $40950
As a result, our trader must win at least 54.5% of the time to break even. I did not include the fees for the 1000 trades which would make it even worse.
The edge in Binary Options trading always belong to the brokerage firms.
Each brokerage firm knows how much payout they can afford to give based on internal statistical data they have gathered.
Can You Really Benefit From It ?
We have learned so far that Binary Options are based on a yes or no outcome.
A correct prediction gets the trader a predefined fixed amount.
These are the two main reasons why Online Binary Options trading is gaining popularity online especially with the proliferation of social media.
We have all heard about the elusive “Binary Millionaires”.
However, a closer look actually reveal many issues due to lack of regulations and outright manipulations from unscrupulous brokerage firms.
Stories abound online of brokerage tactics such as: delaying of quotes, false pricing report (these two can be avoided with professional tools such as Investing.com App or TradingView charting Tool – We have reviews for both here).
In some cases, brokers will go as far as buying/selling the underlying asset with the goal to impact the outcome of the option should it be close enough.
We cannot fully estimate the extend of these practices for sure.
But how about not taking a chance on a rather biased “market” in favor of the very people (brokerage firms) who are organizing the said market.
For sure, there has to be better online alternatives in today’s world.
What If There Was a Better Way ?
Maybe you have come to this article because you are looking to:
- Take Control of your (Financial) Life
- Create another Source of Income
- Gain Freedom from your Job (Always Known as the Rat Race)
- Create More Flexibility for you to care for Your Loved Ones
- Start an Online Business
No matter your reason, what follows next may well be the answer to your quest.
You see, you have knowledge in a particular area that you can share online and make money from it.
It could be a sport you grew up taking a part in, the career that has now left you wondering what’s next.
This company called Wealthy Affiliate could be the stepping stone for you to get what you deserve our of life.
If you know of a friend or colleague who you think may benefit from this, please do share with them.