Compared to most other investment types, binary options are a relatively new retail investment vehicle; and as with most new things, there are several questions revolving around the concept. One of the most pressing questions is, “Is binary options a scam or an investment opportunity with real potential?”.
Today, we’ll discuss what binary options trading is and how it works. We’ll also take a look at why some consider it a scam and whether or not it really has any potential to be a profitable investment vehicle. So, let’s get right to it, the truth about binary options trading.
First thing first. I never did a binary options trading. Partly because it’s risky to my appetite and partly because I am not much confident to start without researching to my satisfaction. This is a result of the research I carried out so far.
When I’d start with binary trading?
I don’t know, it’s still risky to me for the sheer 50-50 outcome.
What Are Binary Options
Binary options are an investment vehicle that is incredibly unique. When trading binary options, the traders don’t purchase any amount of tangible assets. Instead, they simply make predictions as to whether the value of assets is going to rise or fall.
Also, as the name of the trading option suggests, binary options are indeed binary. This means that there are only two possible outcomes to trades.
Either the trade ends in the money and the trader realizes a predetermined profit or the trade ends out of the money and the trader realizes a predetermined loss. Here’s an example of a binary options trade…
For this example, let’s say that stock ABC is trading at a rate of $50 per share. Through extensive research, a binary options trader decides that the price of the stock is likely to climb to $52 per share over the next 24 hours.
So, the trader purchases a call option on ABC with a strike price of $51 per share (leaving room for slower than expected growth) for $100. The trader knows that if he is correct, he stands to gain a 70% return.
Adversely, if he is incorrect, he stands to lose his principal investment. After 24 hours, ABC is trading at $51.57; a value that is above the strike price. As a result, the trader receives his principal investment of $100 plus $70 as gains on the trade.
Investopedia has a more in-depth explanation of how Binary options trading works.
Why Some Investors Call Binary Options A Scam
There are two primary concerns that some investors have with the idea of binary options trading. Here they are…
- No Asset Is Purchased – In most forms of investing, investors purchase assets. In the stock market, stocks are purchased; in commodities gold, silver, oil and more are purchased; and in forex, currency is purchased. However, in the world of binary options, a contract is purchased, not a formal asset. As a result, investors believe that there is little to no value to the investments made in the binary options space.
- No Trader Can Be Correct 100% Of The Time – There’s no doubt that traders aren’t psychics; if that was the case, no research would be needed and the trader would earn returns 100% of the time. Some investors argue that because of this, traders are more likely to realize losses than they are to realize gains.
Now the question becomes, “Is there any validity to these concerns?”
Is Binary Options Trading Really A Scam?
The bottom line is that binary options trading is not a scam. First off, assets don’t have to be purchased to generate a return on investment. While no exchange of assets may insinuate higher risk, the fact that binary options traders know how much money they stand to gain or lose on each trade actually makes risk management a much simpler process.
Also, those concerned about accuracy rates are correct, no trader can be right 100% of the time; and if you simply guess with every trade, chances are that you’ll be right 50% of the time. This won’t generate a profit as traders generally need to be correct about 60% of the time.
However, that’s not very hard to do. In reality, with a little research and analysis, it’s not uncommon for traders to be correct around 75% of the time; generating a very decent profit in the process. So, at first glance, I can definitely understand the concerns outlined by investors with regard to binary options.
However, when all is taken into account, those concerns are debunked and binary options prove to be a viable investment.
What Do You Think?
I am not saying the binary option is safe. All I tried to say is binary options are legal and legit in many countries including the US. It’s risky for me but may not be for you. Also, if you’re US resident, make sure the broker you choose is not an offshore broker and is licensed to do business in the US, before you sign up for a binary options broker.
What is your opinion of binary options as an investment vehicle? Let us know in the comments below!