Is binary options a scam or not? That is the question. Now for the answer. What I’m about to tell you is my honest assessment of the value of binary options trading. But first, for those who don’t know, let’s define exactly what binary options are. Once we’ve done that, we will then assess their worth in comparison with traditional options trading (sometimes called “vanilla options”). We will do this based on a “return on risk” principle.
Finally, we’ll draw some conclusions based on our observations and in the light of other ways of risking capital for a return.
What are Binary Options?
Binary options have three main elements:-
1. You need to predict a future outcome to be realized within a specified time period – anywhere from 1 minute up to more than a week away.
2. During the period before expiration, no adjustments can be made, nor can the options be sold early for a profit or stop loss. Profits or losses can only be realized at the time of expiration. They are also absolute and final.
3. If the outcome is realized, you receive a profit on what you risked – usually about 70 percent. If the outcome is NOT realized, you lose most of, if not all, your invested capital on that trade.
In summary, the reason why they are called “Binary Options” is because the results can only be a win or a lose. This is final and absolute. There is nothing in between. Hence the term “binary” (meaning “twofold”).
Is Binary Options a Scam?
The answer to this question is really one of perception. If you’re one of those people who can consistently pick winning outcomes and can do with for an overall profit, or have a proven binary options trading system that does this, then I’m sure you will be waving the flag for binaries.
But let’s run a few numbers. We’ll assume a generous profit of 75 percent for wins and 100 percent loss for losing trades.We’ll also start with $1,000 capital and each trade will risk $100.
On a given day, you place 5 trades on anticipated outcomes for currency pairs within a 5 minute expiration period. Your first 3 trades are losing ones – you’re now down to $700 capital. Then your next 2 trades win and at 75% profit, you make $75 on each. So you’re down $300 to begin with, then up $150 – an overall loss of $150.
Let’s say that you’re better at picking winners and you win 3 and lose 2 trades. You’ll be up by $225 ($75 x 3) to begin with and you’ll be very happy at your new account balance of $1225. Then you’ll lose the last 2 trades and be down $200. So your ending balance for the day is $1025 – a profit of just $25, for risking a total $500, in 5 x $100 trades.
If you’re really good and win 3 out of 4 trades (or 75% win rate), you’ll make $225 on the wins and lose $100 … a net result of $125 profit.
How confident are you, that you can achieve an 75 percent success rate, bearing in mind that you can’t close out a position if it temporarily goes into profit – you have to wait until expiration for the result?
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Looking at it Another Way
You could say that trading binary options where the profit is 70 percent and the loss 100 percent, is like betting on the favorite in a horse race, where the win dividend is $1.70. The only difference is, that in this “race” there are only two horses – one is called “Up” and the other “Down”.
If one horse in this “two horse race” was far superior to the other, then you would feel confident of a win. That would be like saying that the odds of the currency pair being above where it presently is, in five minutes time, is very high.
Is Binary Options a Scam if you Have a System?
So here’s the thing – at 70 percent profit, can you devise a trading system whereby one winning trade will “pay” for all previous losing trades and then some?
You could employ a trading strategy whereby, after each loss, you increased your bet by an amount where the winning bet would “pay” for all previous losses and then some. But at only 70 percent profit, you would need to increase your bet by a minimum 2.35 times the previous one in order to win overall.
So now you need to decide what your first trade amount would be. For example, after 3 losing trades on a starting bet of $20, your 4th trade would be $261. But if you had started with $100 then you’d be risking $1300 on your fourth trade.
I suspect you’d be feeling a little jittery by then! If you started with only $2,500 trading capital and you lose this one, then your next trade will need to be more than your entire starting bank. If you’d started with $50,000 then you might not be so concerned … yet.
If you’re only starting off with $20 for your first trade, you then have to ask yourself whether the investment of time and patience, waiting for the right trade setup and realizing profits at 70 percent, is worth it to you.
So is binary options a scam or not? Looking at the above numbers, my conclusion is that, considering the absolute and inflexible nature of binary options in comparison to traditional options, it would not be a preferred trading instrument for me. There are so many more opportunities with traditional options.
Even if I was going to implement a money management system as described above, then I would be looking for a much higher dividend payout than $1.70 for a win. I would be better off picking the eventual winning horse in races only paying above $5.00 for a win, or a minimum $2.00 for a place and doubling my bet each time until it pays.
At least then, my chances of profiting without wiping out my entire capital would give me more losing opportunities before the winning trade saved the day. But then I’d have to be good at picking winning horses.
Further Reading on Binary Options