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It’s OK if you have. We’ve all seen those shiny ads littered across our social news feeds and the rest of the internet. At times they even seem really good. Maybe too good!
“Trade from your phone, anytime, anywhere”
…..and yes, in case you were wondering, we’re very sorry to say that this is a REAL binary options advertisement behind the text.
“Make $1000s in seconds”
“$500 Sign Up Bonus”
“We made millions and never had a losing trade with this trading system. Only 3 spots left!”
Unfortunately as the old adage goes: “if it’s too good to be true, it probably is”. Of course, not only is it too good to be true, it’s also downright dangerous.
Binary options and Contracts for Difference (CFDs) are bad news for the average investor.
1. We are committed to the at-home options trader. Too often we see new traders get involved with these instruments. Either because they confused them with real options trading or because they were lured in by blatant dishonest marketing schemes.
2. Online gambling schemes masquerading around as “investment products” hurt the reputation of options trading in general. Standardized equity options trading certainly has nothing to do with Binary Options.
Here’s the thing with binary options. Promoters sell these contracts on the simple premise that if you bet on the right side of the market, you win!
If you are bullish and believe the market price will move up at expiration, you win. Regardless if the price at expiration is $0.01 or $1 over the strike price. Conversely, if you have a bearish outlook for the stock, you choose a price below the current price. Therefore, if the market price goes down (again regardless if a penny or a dollar), you win.
Why is this? Because there is no underlying product. In the same way that you don’t win the horse if your horse wins at the track. You are “playing” against the counterpart. For instance, in many cases this is the broker house (alarm bells). Alternatively, you play with a few brokers and there is a market, while the counterpart is another “trader”.
Even if you’re lucky enough to filter down to the “reputable” binary options brokers, traders still encounter many problems when they deal with these so-called “products.”
These “bets” trade mostly in unregulated markets. Furthermore, they may or may not even be liquid. This lack of liquidity can become problematic because of the European-style exercise. Once they lock you in, you are in it for the duration, with no chance to exit the bet until it expires.
Binary options steal all the same trading terminology as regulated, equity options. You will see ‘puts’, ‘calls’, ‘strikes’, and ‘expiration’ in both worlds, however, binary and regulated options trading are completely different.
Binary options steal all the same trading terminology as regulated, equity options. You will see ‘puts’, ‘calls’, ‘strikes’, and ‘expiration’ in both worlds, however, binary and regulated options trading are completely different.
Contracts-for-difference is an arrangement between an investor and a broker. The arrangement differs from binary options in that they present far greater risk. Why? Because your cash outlay is a percentage of the contract’s value. You may stand to make money from these bets. However, more likely than not, you’ll be at risk for a greater loss potential than with other types of “betting” investments.
Binary options main draw is their promised simplicity and large profits. Simply choose UP or DOWN and profit in seconds. Now, that certainly sounds good!
Binary Options & CFDs are worse than “investing” in roulette
Most of us know this form of “binary betting” asblack or red in the game of roulette. Put $50 on black and if the ball lands on black you get back your original $50 + $50 more. If you’re familiar with roulette you’ll know that there are 36 numbers with 18 red, 18 black and either 1 or 2 green.
Roulette pays 1:1 odds for picking red/black correctly with a slight casino edge. That is, the chance of winning $50 ($100 if considering your original bet) is either 18/37 or 18/38.
Binary options are much worse. In fact, perhaps it’s better to liken binary options to Russian Roulette.
Typical binary options brokers payout is between 60-90% of the “invested” amount. I.e., if you “invest” $50 dollars in a trade and pick the correct direction, you’ll return $80 to $95. Yes, a 60-90% return in seconds (and what is notably often advertised).
Let’s go a little bit deeper down this rabbit hole. Binary options force you to trade only in the very short term with no magnitude to the “amount” you are right or wrong. Over the short-term, stocks behave randomly. As a result, your chance to pick the correct “side” of the market is only 50%.
If you do the math, you’ll realize that a binary option is not an “investment product”. Also, it claims the title of worst odds of any game on the casino floor.
Let’s pretend for a second that you could purchase the “holy grail of trading signals”. You would still “play” against a major headwind, because the payout is clearly not in your favor.
These instruments have evolved out of forms of commodity insurance. Yes, they can be used for extreme speculation. Indeed, a practice we don’t advise. You could certainly lose all your money with standard options too. However, they can be used to transfer risk and stabilize market prices. In fact, responsible use of “real options” can have even less risk than stock trading.
Real options trading involves strategies and mathematics. You need an understanding of how general and specific factors, and evaluation of volatility and risks influence stock prices. If your expectation with options trading is to choose correctly if the price will move up or down, then you’re in for an uncomfortable surprise. Especially when you choose the direction correctly and lose money all the same.
Many people gamble. Just look at the popularity of Vegas. Although, in Vegas it’s at least clear that it’s gambling and it’s heavily regulated.
On the other hand, Binary Options and CFDs promise little to no risk and great returns in seconds. In fact, they are almost like the comical snake oil placebos sold from the time of the U.S. gold rush to the mid 1950s – great pitch, no result.
Binary options and CFDs are part of what we call the three “D’s” in the investing world: dishonest marketing; dishonest products; dishonest talking heads.
CFDs are so risky that regulatory agencies around the world have issued advisories cautioning involvement. Regulators raised concerns that include potential money laundering schemes, improper risk disclosures and qualification of investors. Even of brokers sometimes obtaining the best execution on behalf of their clients.
Many financial regulators filed customer complaints in the U.S., U.K. and elsewhere seeking redress from fraudulent schemes. Daily Mail in London reported that these schemes netted losses up to £200,000 a day for some investors, also including pensioners.
The SEC and CFTC along with the FBI and countries like the State of Israel, are launching investigations. They’re hunting online trading shops and others which are involved in targeting vulnerable individuals to invest in binary options and CFDs.
The levels of diception and honesty are clear in the way that they market and sell these schemes. Also you can tell by the type of people (“talking heads”) that promote these products that lure unsuspecting investors into losing, in some instances, their life savings.
It’s simple. Stay away from binary options and CFDs ‘trading systems’.
You will not and should not make 400% overnight when you trade in any type of instrument. At least not without having some type of psychic insight, that, even professional traders who do this for a living, lack. And if you had such a system, would you give it away for $99, or whatever?
In conclusion, marketing practices of Binary Options and CFDs are downright deceptive. So, what about the rest of the investment advice out there?
Be very careful of taking investment advice from the television or even the news. Healthy skepticism can save your portfolio in the long run. Test your sources of information and never “bet the farm”. Ask yourself: “Why would they give you such great advice for profiting for free?“. Unless, of course, they already own the position.
We always advocate small, consistent, mechanical positions. Not only will this keep you sane, but it will also let you thoroughly test new sources of information. And while you’re at it, of course, greatly limit your risk.
In conclusion, any online investment or news report that promises tremendous opportunities for gains with little-to-no-downside-risk should be viewed carefully or avoided altogether.
No such investment strategy exist – not even from those that are considered a reputable source. Investment companies must always provide you with the appropriate risk disclosure.
