Among the relatively recent ways to apparently make a lot of money very quickly and with not exactly the hugest amount of either starting capital or effort is a form of online trading known as Binary Options.
This is almost 100% proof gambling packaged into a lethally simple package that even a complete dolt could operate.
Basically, the alco-pop of the online trading world, targeting both jaundiced day traders on the lookout for shiny new objects with which to distract themselves and novices deluded by dreams of quick bucks who somehow believe they can make money with binary options despite being in possession of zero previous experience with financial derivatives.
So what is binary options trading and how does it work?
The Dummies Guide to Derivatives
Well normally, an option confers a right (but not an obligation) to buy or sell an asset of some kind (stocks, currency, commodities, whatever) at a predetermined “strike” price and thus the amount of potential profit or loss is determined by how far from the strike price the value of the asset is when the option expires.
All options are time limited and thus a gamble on how things will be at a specific time in the future. Furthermore they are not free – you have to buy an option. But then again, if the price moves wildly against your prediction you can cancel (or liquidate) your option and all you lose is the money you paid for it, which is usually a whole lot less than you might have lost had you bought the asset instead. So, used for their intended purpose, to protect against unforeseen swings in markets, options are indeed a Good Thing™.
So what are binary options and how do they compare? Well a binary option is similar sort of animal but with some striking differences. There are all manner of subtle variations in the construction of types of binary options, but let’s just stick with the basic model as offered by most online binary options brokers…
How Binary Options Work
First a bit of background… binary options trading first arrived on the scene in the USA sometime in 2008. It essentially involves making a prediction as to how the price of a currency, commodity, stock or index will have moved (i.e. up or down) by a selected expiry time.
Typically the trading window is on the hour and trading is permitted up to ten minutes prior to expiry. However, unlike its regular cousin, a binary option cannot be liquidated prior to expiry – but then unlike the regular variant the risk is neither unknown or unlimited, so that’s not really a big deal. Another key difference is that, as with any type of bet, there is no fee attached to a binary option.
The terminology used is conventional, so a “call” binary option is similar to a right to buy, but instead of acquiring an asset at a relatively low strike price when its value goes up, a binary option delivers you a predetermined sum of money. Quite often somewhere in the order of what you paid for the option plus up to 80% more. So plenty of upside for sure.
A “put” or sell option works the same way but in reverse, so you can even make money on a fall in the value of an asset. But the point is that the amount at stake is not variable and dependent on how far the value goes up or down. All that matters is the direction of the change in value – up or down. The amount “won” or “lost” is fixed and not actually related to the value of the underlying asset.
However, should your prediction be less than stellar then you lose all the money you spent purchasing the option. That’s why it’s called “binary” – it either all or nothing and indeed they are often also referred to as digital options, fixed return options or all-or-nothing options. Fixed return alludes to the fact that the amount you might gain or lose is determined up-front and will not vary.
Now some brokers phrase things differently, so you get an agreed sum less the cost of the option, rather than a refund on the option plus some percentage uplift, and some will even return a small percentage of your option money (say 15%) when you lose, but the math all works out the same in the end…
Let’s say you purchase balancing “call” and “put” binary options for the same event, each costing $100 with an 80% return for a win. So you started with $200 and the certainty that one prediction will be correct and the other incorrect (ignoring for now the possibility of no movement at all). Let’s see how that pans out…
And the Problem Is?
So, you placed matched “call” and “put” options for $100 each, meaning that when the 2 options expire you kiss goodbye to $100 and warmly welcome $180 – a nett total of $20 less than you started with.
And that in a nutshell is why, over time, trading binary options is a losing game. Like all casinos, the house sets the odds and they’re set to favor the house.
Now of course there is somewhat more to it than that. For a start the events you’re betting on are not truly random and you should, with a certain amount of expertise and effort, be able to predict correctly more often than not.
But any time your “predictions” start to resemble guesses more than carefully considered analysis then you’re right back in the world of coin flipping. And we’ve already seen how an even balance of wins and losses results in haemorrhaging money.
That said, there are indeed people who make good money because they understand and respect the most important consideration when trading binary options. They’re prepared to put in the time and effort to conduct appropriate research and also protect the downsides using effective binary options trading strategies based on proven mathematical formulas.
There are also some who somehow manage to stay afloat using rather simplistic “strategies” such as buy in Bull and sell in Bear markets. But for the majority of punters it’s yet another fool’s paradise.
Are binary options a scam? Well no, just as any kind of gambling isn’t really a scam. It is (or at least should be) pretty damn clear that there are inherent risks and a statistically greater chance of losing rather than winning money. An out and out scam involves deceit, whereas most forms of gambling are pretty open about the odds and just rely on the ignorance or pathological optimism of their punters.
So… the question you need to ask yourself, punk, is “Do I feel lucky today?” and if the answer is either yes or no then carefully back up and walk away ‘cos making money has fuck all to do with luck.