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A buyer will either get a payout or lose the entire investment, with no other possibilities – all or nothing. A seller of the binary option either keeps the premium paid by the buyer or must make a payout. For the two sides of the trade – buyer and seller – one makes a profit and the other has a loss. The amount of profit and loss is set in advance and is fixed. Traders also are not allowed to cover the open option by taking a position in the underlying. This sounds simple enough, just like a bet on the roulette wheel for red/black, even/odd, or high/low. 50/50 is easily comprehended by traders, and options traders – accustomed to a variety of possible outcomes – might find this idea appealing. But it is not all that simple in practice. A problem with binary options is that fraud often has occurred in trading. Regulators in many jurisdictions have banned trading in binary options because of this. For example, Europe and Australia have completed banned retail binary option trading, and investigations have taken place by the U.S. after allegations of fraud were made. The FBI issued a report on this problem. The problem involves big money. Hundred of complaints adding up to millions of dollars were filed by 2016. These were only the reported cases, and the total instances cannot be fully known. In some European countries, for example, the estimate has been made that options fraud is responsible for at least one of every four fraud complaints filed. The types of fraud take three forms, according to the FBI, and most perpetrators are overseas, making it challenging to regulate their activities. The first form of fraud happens when customers trading binary options are not given funds they have earned. Inquiries often are met by ignored phone calls or emails. The second type involves identity theft, where binary option operators tell traders they must provide copies of credit cards, passports, and other personal data. Third is manipulation of the software used to track trading activity. Prices are distorted and even expiration dates may be extended for the winning side of the trade, so no payout is generated. Fraud has been widespread in some jurisdictions, and website operators advertise widely to recruit unsuspecting traders. They have promised low risk and easy profits, as well as excellent customer service. Many operate as boiler rooms, pressuring unsuspecting traders to jump on the bandwagon to “big money” with “once in a lifetime opportunities” to get rich. Sadly, this boiler room approach continues to work on some traders, and a focus may be on the inexperienced trader who knows little or nothing about options. The promise of low risk and easy riches ids appealing to many. The FBI has estimated that these overseas operators may have fraudulently stolen as much as $10 billion worldwide, going so far as to use names of famous people and fake endorsement claims, to add an air of legitimacy to the scheme. [Weinglass, Simona (March 4, 2017). “As Israel-based financial fraud soars, police swoop on 20 suspects as part of global, FBI-led strong.” The Times of Israel] The fraud is such a serious problem that advertising for the products has been banned by Google, Facebook, and Twitter as of 2018. A big problem for binary options is their gambling attributes. Brokers (the house) have an edge over traders just like casinos, so the binary market is not a level playing field. These have been advertised for traders needing little or no experience in the options market, claiming for example that it is so low-risk and easy to win that anyone can make a profit. Realistically, the edge enjoyed by the promoters is significant. You need to win more than half of your trades just to break even because of the charges paid by the operators, and because the realistic and seemingly obvious odds are 50/50, it is unlikely that any traders can realize consistent profits. Even with the widespread fraud known to exchanges and regulators, these products can be traded on most U.S. exchanges, and were approved as long ago as 2008 by the CBOE. They are called “fixed return options” (FROs) and use a settlement index, in theory to reduce the danger of price manipulation. CBOE offers these on the SPX (ticker BSZ) and the VIX (ticker BVZ). For traders who must trade in binary options, a few smart steps are recommended. First, make sure any platforms used are registered with the SEC. This can be checked at the EDGAR website. Check with the CTFC to make sure the platform us a designated contract market. Thousands of sites promote binary options, but only a few are authorized to do so. Check this here. Check registration status of the firm at the Financial Industry Regulatory Agency. Check the CFTC’s Red List, also called the Registration Deficient List, containing names of foreign websites that are supposed to register, but have not. Finally, don’t invest in something you don’t understand. If you can’t explain the investment opportunity in a few words and in an understandable way, you may need to reconsider the potential investment. The wise approach to binary options is to proceed with caution. Even with public listings on index underlyings, the claims of low risk should be questioned. It can be assumed that U.S. regulators, offering binary options domestically, are able to carefully monitor and control how prices are set and tracked. Even so, nothing is a sure thing despite claims to the contrary. Some traders continue to pursue overseas website-based binary option products without verification, even with knowledge of the warnings by worldwide regulators. Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs as well as on Seeking Alpha, LinkedIn, Twitter and Facebook. Related articles: Lookback Options Ratchet Options Chooser Options Ranges Of Exotic Options

With binary options, you either double your money or lose it all: the roulette table of options trading. Some traders like the simplicity of 100% return versus 100% loss; but it’s not for everyone. Beating the 50-50 consistently is a challenging idea. It might be possible if you believe in technical analysis and use signals to time a trade in binary options. For example, if the underlying price moves above the upper Bollinger Band or below the lower band, retracement is more likely than any other time. An even safer timing move is when the Bollinger default of two standard deviations is changed to three standard deviations. A move outside of the bands is as close to certain to retrace very quickly. If you’re not sure about this, set up the 3-Sigma default and check as many stocks as you want. You will see that price never remains in that status for very long; even two to three days outside of the 3-Sigma is rare. Most traders know all about swing trading and the timing of buying calls or puts. The shorter the time to expiration, the cheaper the options but the more rapid the time decay. The farther away, the more expensive the option but the more beneficial the timed element. It’s a dilemma of proximity, timing and volatility, all working for (or against) you. Enter a solution (or a speculative flaw), the binary option. Without expert timing based on technical signals (like Bollinger Bands, double tops and bottoms, momentum oscillators like RSI, volume spikes, t-line crossover or large price gaps associated with earnings surprises), binary options are pure gambles. This does not mean they don’t have a place in a trading program, at least not for everyone. The binary sets up a strike. If the underlying price is above a call’s strike before an identified deadline, you make a 100% profit. If the price is below the put’s strike by that deadline, it is profitable. Otherwise, the binary is a 100% loss. These tend to be extremely short-term, usually the same day. By the end of the day, the binary call or put will be totally profitable or a total loss. For example, you buy a 50 binary call, hoping the ending price today will be higher than $50 per share. Subtracting trading costs, you stand to earn about $45 on your $50 risk; or to lose the entire balance. If you think the price will be below that 50 strike, buy a binary put. The many sites offering binary options can be found easily with a Google search. But be wary of the promises made by many. For example, some sites promise you a 50% to 75% return every hour by trading binary options. This could happen (about half the time), but it is unlikely that you can get that level of return consistently. Many traders believe they have superior ability at chart reading and technical signal interpretation. But it is gambling and consistently calling the right direction – even with an array of convincing signals – is not all that easy. We have all met gamblers who will follow the roulette table and, upon seeing ‘red’ hit five time in a row, will place a bet on ‘black,’ ignoring the facts: Every roll is independent. But they insist it’s a surefire way to get rich. Maybe so, maybe not; but betting on a binary option is a gamble, and the quirks of the moment as the market comes to a daily close often defy even the strongest technical signals. The rationale that you cannot lose more than the entire amount you bet is appealing to some, but it is still a 100% loss. Perhaps the most sensible use of the binary contract is to use it occasionally when the signals are so convincing that you think your chances are close to 100%. For example, an underlying price moves below the lower band with a 3-Sigma set, and you are certain a retreat is imminent. But you wait until the second day. If price is still below that lower band, you buy a binary call expiring by the end of the day. In this case, you have a better than average chance of profiting, but it is still a form of gambling. But it is based on a technical signal and not just a hunch. Binary options could have a place in your swing trading program but keep the entire field in view. Be aware of overall market volatility. Time the binary trade and limit your exposure. In other words, be aware that it is a gamble and not a sure thing. You will win sometimes, you will lose sometimes. The important thing is to use gambling with options very selectively. Be analytical and avoid being a binary thinker. Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.