Binary Options Trading: What’s the Risk?

What is a Binary Option?

Binary means composed of, or involving two things. Binary describes a numbering scheme in which there are only two possible values for each digit. Binary options are a financial option (a bet on the future of the price of “x”) where the payoff is either nothing or a fixed amount. There are only two potential outcomes, hence the term binary. They are also sometimes referred to as fixed return options (FRO), or all-or-nothing options. You bet on what the price will be at a given time in the future. Binary options trading allows you to place quick options, sometimes as short as 60 seconds into the future.

As a way to counter the unprecedented levels of a binary trading scam, Canada recently banned all binary option trading on trades shorter than 30 days.

How do binary options work?

Step-by-step guide to how binary options trading works:

The price of silver is currently $200, will the price be above $200 in 24 hours?

You believe it will be above $200, so you buy the binary option. If you believe it will be below $200, you sell this option.

The price of any binary option is always set between $0 and $100. Whatever the price is, is how much you have to pay to buy the binary option. Assuming the price on the binary option of silver being above $200 in 24 hours is $40, it will cost you $40 to place this binary option.

24 hours later: If the price of silver is above $200, you have just earned $100 – $40 (your bet) = $60, (all options equal 100, this specific one had a 60/40 split). If the price of silver is below $200, the option expires at $0 meaning you have lost your $40 bet. All binary options end up being either $100 or $0.

Every investment is a risk, what’s the difference?

In theory the risk involved in binary options trading is simple, straight forward and compared to something like spread betting it could even be considered limited. However, the reality is that trading in binary options is much riskier than at first glance. The binary trading scam is real.  The initial risk in binary trading is finding a legitimate and regulated broker. The amount of unregulated binary options companies out there is staggering – it is an industry in itself. Regulation however, does not mean risk free as shown by the fall of one time publicly traded company EZTrader. There are many people who have been defrauded by the binary trading scam. This is usually done in one of three ways:

  1. Not allowing the client to withdraw his/her funds.
  2. Adding ‘bonus’ money to client accounts where the client needs to trade 30x the bonus before a withdrawal is an available option.
  3. Trading away the client’s money in high risk bets.

The last tactic causes particular problems when you realize that the unregulated binary options companies make money when you lose money, not the other way around. The operations are not here to help you, it is fundamental to their operation that you lose.

How to Avoid the Binary Options Trading Scam

Before deciding to give your details to a binary options company, spend some time doing your own research. Type in the name of the company followed by ‘scam’ and read the reviews. Do not allow one review to convince you, these fraud experts are extremely diligent in their approach and are renowned for writing and posting fake reviews. The safest way is to simply never trade in binary options. For any type of investment, we advise due diligence, especially when it comes to investing in binary options.

The size of the fraudulent binary options industry has grown so large that there are now companies, such as Wealth Recovery International, set up by former binary options insiders focused on gathering intelligence in order to return the stolen money back to the victims of the elaborate deception. The industry has become so maligned and lacking ethical oversight that these fraudulent operators have the audacity to try and defraud the same clients by claiming that they can recover their lost funds. As we said, it is an industry where you cannot believe all that you see.

Conclusion

To reiterate: there is nothing endogenously fraudulent about binary options trading, and not all binary options companies are a scam. The scam artists have been pulled towards binary options like a magnet, due to high returns and relatively low risk. The underlying problem that has made binary options a dangerous risk to many is bigger than binary options itself. It is for all intents and purposes the same customer acquisition paradigm as an online casino, only the difference is that psychologically, the binary ‘trader’ doesn’t think it is a gamble, but an investment. This difference is not semantic, it is the keystone to the psychology of the scam. No casino would call the client to sell them on the potential profits, if only they deposited more money. It is counter intuitive to the whole operation. With binary options however, this is part and parcel of the sales pitch.

The binary trading scam has fostered exponentially, thanks to the business structure behind it. The attention economy: affiliate marketing and clickbait media mixed with aggressive boiler room sales tactics.

The affiliates are the ones who send traffic to the binary companies. Binary companies will pay the affiliate per lead. It is of no interest to the affiliate what happens to them after they have clicked through and become a lead – they are only interested in getting paid.

This model is used successfully by online casinos, paying up to $300 for a single lead. For an unregulated binary options company, it is seen as ‘worth it’ to pay hundreds of dollars for a single lead, meaning that the company has invested in you before you have started trading. From this moment on, the unregulated companies only make money when you deposit (deposit can be swapped with ‘lose’ here as it is the same outcome).