Binary options have become increasingly popular over the years. Now they are being banned in countless countries. In this binary options review, you will learn the complete truth about binary options. You will learn how they work and why they are getting banned. And don’t worry, I am not a binary option promoter, so this binary options review will be the real objective truth and not some scammy promotional post.
What are Binary Options
Before we get into the interesting stuff, I just want to explain what binary options even are. Binary options aren’t anything new. I actually own a derivative book published in 1989 and already in this book, there is a short paragraph about binary options.
Binary options are a derivative just like futures, vanilla options… This means their price is based on an underlying asset which can be almost anything (e.g. a stock). Just as the name implies, binary options are options. In fact, they are exotic options meaning that they work somewhat different than normal vanilla options.
Binary Options Trading Explained
Binary options are ‘make it or break it’ bets. This means either you win a certain amount of money or you lose a certain amount of money. There is no in between. They are fixed-return options.
Usually, you can’t select a strike price for binary options. So the strike price normally is always the underlying asset’s trading price. The time frame that a binary option is active can vary a lot. But most binary options brokers only offer very short-term binary options with expiration times of a few minutes or similar.
If you are wrong on a binary option position, you lose your entire investment. If you are right, you will achieve a profit. The size of this profit depends on the payout ratio of your broker. A common payout ratio is around 70% which means that you will receive 70% profit on your initial investment if you are right.
Just like with vanilla options, two different types of binary options exist: Call and Put options.
As you can see on the following payoff graphs, a Call option profits if the underlying asset’s price increases, whereas a Put option profits from a decrease in the underlying’s price.
Here is an example of a binary option trade:
The underlying asset is XYZ which is trading at $100. You decide to buy a Call binary option meaning that you think that XYZ’s price will go up. You pay $10 for the Call option. The option expires in five minutes and its payout ratio is 70%.
Now there are two possible scenarios:
- XYZ’s price increases and the option expires: If this happens, you were right and will make a profit of $7.
- XYZ’s price decreases and the option expires: If this happens, you were wrong and thus lose your entire investment of $10.
To recap, to trade a binary option, you will need to choose:
- An underlying asset
- A time frame
- An option type (Call or Put)
- An investment amount
What Most People don’t tell you about Binary Options…
Now let us get into the interesting part of this binary options review. I will now tell you something that most other websites won’t tell you:
Binary option aren’t legitimate investment products! That’s right! Binary options aren’t legitimate products!
Why? Because they aren’t fair. Just like a game of roulette in a casino isn’t fair, binary options aren’t either.
Let me explain to you why binary options are set up just like gambling products.
The payout ratio of a binary option is always less than your risk. This means you can’t win as much as you can lose. This makes them unfair products.
To understand this better, I want to present you an example of a coin flip game. You probably are aware of the fact that a coin has about a 50% probability of landing on tails and a 50% probability of landing on heads.
So the odds of picking the right side are about 50%.
Now I want to ask you a question: would you play a coin flip game in which you could lose $1 if you pick the wrong side and win $0.5 if you choose the right side?
I hope you wouldn’t because this game is unfair for you. On 10 rounds of this game, the expected outcome would be 5 wins and 5 losses. But if you would lose $1 five times and only win half a Dollar five times, you would be at an overall loss.
Over the long run, you will lose money playing this game.
Binary options work the same way as the just described game. Your wins will always be smaller than your losses. So to make any money with binary options, you would have to have an extraordinary high win rate.
Predicting very short-term price movements is very hard and therefore, it is practically impossible to make any money with binary options.
A binary option with a payout ratio of 70% would mean that you would have to have a win rate of almost 60% just to break even! And that’s without even taking commission costs into account! Even with a win rate of 60%, you wouldn’t make any money.
In addition to this expected negative return, your odds of making any money are even lower due to how binary option brokers execute your binary option positions. Often, brokers will get you into a Call option position above the current underlying asset’s price and into Put option positions below the current underlying’s price. This means that it isn’t even enough to predict the correct direction. The underlying asset has to go all the way above (for Call options) or below (for Put options) the ‘by your broker’ chosen price. This means the odds are even worse than 50/50.
And believe me, using some fancy indicators won’t be enough to make you win and the broker lose.
But doesn’t the broker want you to win?
NO! Binary options are Over-The-Counter (OTC) products which means that the broker is your counterparty. In other words, they take the other side of your trade. That is a huge conflict of interest. The broker is practically trading against you. Therefore, most binary option brokers will go as far as possible to make you lose (and to make them win).
And that is still not everything!
By far the most binary option brokers are based (and regulated) in countries like Cyprus, Cayman Island, Bahamas etc. Regulations from these countries are very sketchy and untrustworthy.
This means there is no guarantee that you will get your money back after depositing it to such a broker!
That is also the reason why there have been countless incidents of people not getting their money. So even if you are extremely lucky and win some money with binary options, you probably won’t be able to withdraw these winnings.
But why have binary options become so popular if they are a blatant scam?
Great question! Binary option brokers have done everything possible to promote their scammy binary options. When I say everything, I mean everything!
Binary option brokers have literally created thousands of fake accounts on countless sites to tell everyone how great binary options are. Just go to any forum (e.g Quora) on the internet and look at threads about binary options. Many questions and most of the answers are from binary option promoters themselves. Due to this, loads of unknowing people have become lured into the trap of binary options.
Furthermore, almost all binary option brokers offer very lucrative affiliate programs. So tons of (greedy) trading sites have been promoting binary options because the binary option brokers have been paying them to do so.
Conclusion – Can you Make Money Trading Binary Options
Once again, binary options are a complete scam and they aren’t legitimate investment products. So if you want to get into trading, binary options aren’t the way to go! In other words, you can’t make money with binary options (unless you are a binary options broker).
I am not even exaggerating when I say that your money would be better off in a casino than with a binary option broker!
If someone is promoting binary options, they are either in bed with the binary option brokers or they have no clue what they are talking about.
Here is a short recap of why binary options aren’t legit:
- You have an expected negative return
- Bad executions
- Conflict of interest
- The broker is trading against you
- Sketchy regulations
- Countless incidents of non-withdrawable money
- Shady promotional tactics
These facts are also the reason why binary options are getting banned in countless countries. Even the EU has finally recognized that binary options aren’t real investment vehicles. That is why the new ESMA regulations are banning binary options.
One example of a binary option broker is IQOption. They aren’t as scammy as some other binary option brokers, but they still aren’t trustworthy! Make sure to check out my IQOption review/exposé.
Trading is hard enough on its own. You really shouldn’t make it even harder by trading binary options. If you do, you will lose your money! No one except for the binary option broker is making money with binary options!
Besides the fact that binary options brokers are stealing unknowing traders’ money, binary options are also shedding a bad light on the entire trading industry and on normal options.
Normal vanilla options are real investment vehicles that have an actual purpose. Trading real (vanilla) options is a legitimate thing and can be very profitable. Sadly, a lot of newer traders fail to distinguish between real (vanilla) and binary options even though there is a huge difference (namely that binary options are a scam and vanilla options aren’t).
If you want to do yourself a favor and learn more about real vanilla options, make sure to check out my free options trading education.
Hopefully, you enjoyed this binary options review and learned why you should NEVER EVER trade binary options!
Have you ever been scammed by a binary options broker or have you had a similar experience?
Let me know in the comment section below! If you have any questions, please let me know as well.
Also, make sure to share this binary options review so that more people can learn about the dangers of binary options.