If you’re interested in trading, it is possible you have heard of binary option trading. If you have, it is also likely, that the things you heard were not entirely positive. Binary trading has a reputation to be fraud, while binary trading enthusiasts like the traders on binaryoptions.com swear by the trading strategy and try to advocate for it. What exactly is binary trading, why would it be considered a scam, and how much truth is behind those accusations?
Table of Contents
What is Binary Trading?
Binary trading is a form of option trading. In its simplest variation, the vanilla options trading, you buy the option to sell or buy an asset before or on a specific date. The value of the option is determined by its underlying security, meaning the asset (a stock or a different security) you are buying the option of.
➔ You buy an option of Stock XY on Day A for the stock’s current value, the spot price, and agree to sell it by Day Z for the strike price, the option’s value at the time of selling.
➔ The value of Stock XY on Day Z determines how high the selling price is.
➔ Is the strike value higher than the spot value, you have made profit.
➔ If you fear the value of the option will sink between Day A and Day Z, you might also sell the option anywhere in-between. If you sell it on Day F, you might win or lose money, depending on the stock’s current value.
Call- & Put-Trading American- & European-Style
Call and Put are descriptive of whether you buy an option to sell or buy before the determined date (expiration).
● The call option gives you the right to buy the underlying asset at the strike prize before or on the predetermined date.
● The put option gives you the right to sell the underlying asset at the strike prize before or on the predetermined date.
Whether you buy or sell them American- or European-Style determines whether you have to buy or sell the asset on the predetermined date (European) or anytime in between (American).
In our above-mentioned example, you buy a put option of Stock XY, American-Style.
Exotic Option Trading
Option trading that follows more specific determining factors than these is called exotic options.
A selection of exotic options include:
● Asian Option | The value of the payoff is determined by the average value of the underlying asset over a set time-period.
● Bermudan Option | You can only buy or sell on specific dates on or before the determined expiration date.
● Barrier Option | The underlying asset’s value must reach a certain threshold before you can sell or buy.
And finally, our
● Binary Option | You profit or lose everything, depending on the underlying asset reaching a predetermined condition.
A Binary Trading Example
To go more in depth:
➔ You buy a put option of Stock XY for $45.
➔ You predict the value of the underlying asset (Stock XY) will be higher by Day Z.
➔ If the value will be lower, you gain nothing and lose the invested $45.
➔ If the value will be higher, you gain $100 (the max value of an option in the US) and therefore profit $55.
➔ After buying the option, you notice that Stock XY might be decreasing in value by Day Z.
➔ You sell the option on Day F and gain or lose money depending on the current bid & offer prices of Stock XY.
Why is Binary Trading Called a Scam?
Though all transactions on the stock market are some form of betting, binary option trading has become the target of anti-gambling authorities and was banned by some legislations in the world. They ignore the advantage binary trading has in comparison to other trading forms:
Binary Trading is capped. While you can only win a set amount per trade, you can also only loose a set amount. In comparison to other investments, binary trading will not potentially cost you your entire wealth with one careless bet. You know exactly which payouts or losses you can expect and can plan your budget accordingly.
What has really put a bad reputation on binary trading, is the black sheep who decide to pose as brokers and scam their clients out of their money. This practice is, however, already in the focus of the FBI and other authorities across the globe, who are working hard on catching these thieves.
Conclusion — How to Trade Binaries, safely
So, is binary trading a scam? No. Are there people who would try to scam you when you get into binary trading? Of course, but that is true for most services that deal with money.
If you are interested in binary trading, the best thing you can do is to inform yourself about the topic. Trading platforms and communities want to share their knowledge and help you make good decisions. It is reviews like theirs, that can point you towards trustworthy brokers with licenses, who follow their respective legislature’s regulations.
Like the government advises: Always check the background of a possible service provider when you are dealing with personal data and monetary transactions. If you do so, binary trading is as safe as any other trading investment.