Are Binary Options A Scam?
It is well past time someone made the effort to clear this subject up a bit.
First off: there is no binary options scam.
Q. Why should it be obvious that brokers are not simply fleecing their clients to pad their own profit margins?
A. Because they make tons of money quite legitimately and risking that position for a few more dollars would be quite foolish. Banks and brokers may be many things but foolish is not one of them I assure you (generally speaking that is … see 2008 financial collapse as a counter-example).
The historical use of binary options trading should also be a clue for us that they are in fact not a scam. Institutional investors and investment banks have been trading these instruments for decades now. Binaries are not new or a scam they are simply "new" to most retail traders. It has only been since 2008 that the retail trader has had an opportunity to trade binary options like the so-called "masters of the universe" on Wall Street.
Logical excercises and history lessons by themselves not enough to convince you that there is no scam? Nothing wrong with due dilligence. Let us take a good look at how these brokers actually make their money money we?
How The Binary Options "Scam" Operates
The binary options "scam" operates in much the same way as the WalMart "scam" or the BurgerKing "scam" works. That is, by providing a product or service people want at a price above that of their expenses. Considering the misunderstanding that exists here, however, we think showing you exactly how these brokers make their money might be a good idea. It is not too complex and we'll also construct a clarification example.
The raw equation for a binary options brokers profit is:
Binary Brokers Profit = – [Volume Wins * Probability Of Win (ITM Payout% – 1) + Volume Losers * Probability Of Loss (OTM Payout% – 1)]
ITM = "In-The-Money" – We have a winner!
OTM = "Out-The-Money" – Better luck next time!
Probability = 0.5 in both cases in this equation (Win, or Lose. 50/50 shot in an efficient market)
For puposes of constructing our example below lets assume our hypothetical broker pays out 71% for ITM trades and 15% for OTM trades.
We'll also absorb even volumes of $ 5,000 in winners and $ 5,000 in losers (equal volumes being roughly accurate in any long-run measurement).
Plugging these numbers into our equation we have:
Binary Brokers Profit = – [5000 * 0.5 (1.71 – 1) + 5000 * 0.5 (0.15 – 1)]
= – [2500 (0.71) + 2500 (-0.85)]
= – [1775 + (-2125)]
= – [-350]
Binary Brokers Profit = + $ 350
So, our hypothetical binary broker would pocket a profit of $ 350 on trading volume of about $ 10,000. That may not sound like much but volumes traded is immune and these numbers get real big real quick.
Simply put, this is how the "binary options scam" operates. A simple numbers game just like every other broker or bank in out there. We can also manipulate this equation to derive from it how often we as traders need to be right with our trades to be profitable. We'll spare you the work and just give you the answer: 54.5%. Not an overly difficult disadvantage to over if you know what you are doing.
In conclusion we hope you can now see, and understand, why these financial instruments are just as legitimate as any other. They are simple speculative instruments which offer a unique risk / reward profile to investors. Along with the potential for great reward comes great risk and binary options trading is not for everyone. And no one should ever speculate with money they can not afford to lose.
With that said, they can also offer an amazing opportunity for profit which is essentially unmatched anywhere else. Where else can you turn $ 100 into $ 1000 in one week with strictly limited risk as our test trader did just this past week?