Heads or Tails?
Binary Options as an investment vehicle.
Conduct a Google search on Binary Options and you will get over 16,000,000 results!! No one can doubt the popularity of this “new” investment vehicle for individual traders. But what are Binary Options?
Heads or Tails, Ones or Zeros (where the binary comes in), Yes or No, Black or White, Buy or Sell? Regardless of the Binary Option instrument you are trading you are “betting” on the price action/movement (up or down) within a predefined time frame with a predetermined pay-out. Typically a Binary Option Broker explains binary options trading as:
I. Select the instrument (FX, Indices, Commodities and Stocks etc.)
II. Select the “expiry time” and the amount you want to trade. (Many sites have expiry times ranging from minutes to months and your “stake” varies from as little as $1)
III. Select the “direction” (Yes – up/higher or down/lower). Some Brokers will use OTC terminology such as a Put Option (Sell) or Call Option (Buy).
IV. Once you select the direction you will see the “Strike rate”: the price in which the specific option is offered. At the option expiration time, the strike rate will be compared to the underlying asset market price to determine whether the option settled in or out of the money
V. Wait for the trade to mature (reach the expiration time/date) and receive returns ranging from 60% to 90% (of your stake) if your trade expires “in the money”.
In addition many Binary Option Brokers “promote themselves” as offering controlled risk (you can’t lose more than a specified amount), low cost and “the potential for quick, high-percentage rewards and repeated successes”.
Ready to open an account and trade Binary Options? Wait a minute….. Let’s look a little deeper into this “limited risk investment vehicle”:
Although the “stake” amounts may be small (as little as $1), the total can quickly add up if many trades are executed in a day. So be careful as things could quite easily get out of hand.
For any investor who has traded any instrument in the capital markets it is very difficult to determine an instruments direction no matter how much research you conduct. Now if you do take a position (long or short) you are, invariably, looking for a “movement” during the course of a trading day/week/month. So if that is hard enough think how harder it is to determine where an instrument will trade in minutes!! Admittedly there are times when we all expect an instrument to move dramatically: FOMC, Economic data releases, Quarterly Company results etc. But once you place a Binary Option trade you are locked in until expiration. With a margin account trading you have greater control i.e. cutting your loss, reversing a position, taking profit etc.
Akin to a Casino, Binary Option Brokers have a distinct edge over its traders. Looking at a “leading” Binary Options Broker who is offering a Pay-out percentage of 80% on EURUSD. That means for every successful trade of $100 you make you receive $80 (plus your stake back). If you lose you get?? With this particular Broker you get nada! Some Brokers “give” you back $15 for every $100 you wager on a losing trade (great!).
So let’s do some arithmetic:
You “place” 100 trades of $100 and you are successful in 55% of them – which, as I am sure you can attest to, is a reasonably good win rate. You “win” 55 times $80 which is $4,400. However, you lost on 50 trades which is 45 times $100: $4,500. You won $4,400 and lost $4,500! A good days “trading” – I think not!!
Because Binary Options Brokers are, for the most part, unregulated you are swimming in dangerous waters. What protection do you have?
Forgive my cynicism but…. can you even trust the “prices” you are trading on? Remember you get “paid out” at the expiration rate of your option. Who sets that rate? I know I am “opening a can of worms” but price manipulation is highly likely.
I attended an event earlier this year where there were ECN’s, Banks, CFD Brokers and Binary Option Brokers showing their products. I had to smile when I saw one Binary Options Broker showing their trading platform encased in a slot machine! At least they were being “honest” in representing Binary Options as a pure gamble. It is very clear to me that if people want to gamble then that is their choice. However, in my opinion, let’s not confuse Binary Options as trading and investing.
#tradesafely #fxzoo #doublehit