What is Binary Options?
If you don’t know what a binary option is, then let us explain. It is a product whereby you can select a time frame for price to reach above or below. If you think the price will go above a certain level before expiry (expiry can range from 10 seconds to several days, weeks, months), you would buy a ‘call’ option and if you think price will go below, you would buy a ‘put’ option. If you win, you normally win approximately 70-80% of your stake. If you lose, you lose your stake. Simple as; appeals to the simple minded gambler (compare a binary options site to a betting site and you’ll see what I mean).
What’s Wrong with Binary Options Trading
You are at the absolute mercy of the broker. You can say that a lot of FX brokers make up their prices if they run a B book/are a market maker, but they are (on the most part if you aren’t with a broker running MT4 Virtual Dealer Plug In) simply playing out the stats that 70-80% of people will lose money. Why not take the other side? But with binary brokers, they aren’t even following the underlying market a lot of the time & binary options aren’t an exchange traded product/traded on the open market and therefore aren’t at the mercy of supply and demand. Ever thought why investment banks don’t trade in them?
Negative expectancy. Most binary options brokers payout 80% of every £1 invested. So let’s take an expectancy equation: (Reward to Risk ratio x win ratio) – Loss ratio = Expectancy Ratio. And now let’s plug in some numbers. Let’s say you win 50% of your trades with an 80% payout each time (and this is assuming totally symmetric information between client, market prices and broker):
(0.8 x 0.5) – 0.5 = -0.1.
This means that if you win 1 in 2 trades, you will lose £0.10 for every £1 you put in. You can change these figures around to assume, for example, that the broker has a 10% edge, in which case you will lose £0.28 for every £1 you invest… numbers don’t lie.
Bonuses. Once the broker has your money they will slap a bonus on top and say you need to turnover 20-30 times your deposit to be able to withdraw. At this point, consider your money gone. There isn’t much left to say about this because the broker is probably Belize regulated and your money is in the Balkans somewhere. Don’t even try and go to the FCA or the Ombudsman because they won’t do anything.
They are owned by the same firm. Spot Option almost has a monopoly over the industry. Most of the platforms are owned by them, and each firm pays Spot Option white label revenue whereby all they have to then do is market and sell to punters. If you have ever been on the end of a binary options sales call, it is absolutely soul destroying listening to the bloke on the end who thinks he’s smashing the financial world, when really he’s in a glorified boiler room, and there are so many of these firms that have popped up. There is a reason why you receive cold calls and it is merely to enable a transaction of money from your pocket to theirs.
Their target market. Think of who falls for the sales tactics of binary options ‘sales people’. They see the ease of the platform, combined with the promises from the sales people and affiliates that loads of people are making money etc (which is against regulation to say) and a lack of financial knowledge and they deposit. And then they revenge trade when they’re £1,000 down because they know this time they can make it back. On top of this you have the sales person’s promises and before you know it. Food bank. Plastic bags for shoes and a card board box for a bed (hopefully someone’s situation never gets that bad).
Just stay away from them. If you want to waste £1,000 but have a better RR then just pick a direction during NFP and go £10 a point (I do not advise this but in comparison it is better than trading binaries).
Now if you want to trade Vanilla options, which are exchange traded and open to supply and demand, I would suggest one of our brokers who offer vanilla options (IG, LCG, Exante, AvaTrade), and check out our options trading eBook which you can subscribe for below!
Credit/Source: https://davidbellefx.com/