How brokers make money with binary options ?
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  1. #1
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    Question How brokers make money with binary options ?

    My question may seem naive, but I can't find for sure the answer. Everywhere how binary options work is explained from the point of view of the trader. How can such a system work if the broker is not also making money ?

    From my understandings : at no moment any money implied with this transaction is related to the market. I believe it is called an over the counter (OTC) transaction. So, from this angle, that's very like gambling with a casino, where the broker is the bank and the trader is the player.

    If it is the case, the trader is playing/trading against the broker. Unlike in trading forex, where the broker make profit with the spread, whether the trader is making gain or loss.

    So, like a casino, if the broker wants to make profit out of these binary options transactions, his overall clients losses has to be higher than his overall clients profits.

    If my understanding is correct, I find hard to see how binary options can be the next big thing : like in a casino, the trader's interest is against his broker's interest. So if traders are getting better, the broker will have to lower the potential gains or too good traders may even get tossed out !

    I know markets works on the same principle that someone's profit is made of others losses, but the broker is just a proxy, not interfering with his client interest.


    Am I correct on the mechanism of how binary options transaction work ?
    What are your opinions on the consequences ?
    Last edited by Red Uku; 04-28-2013 at 09:31 AM. Reason: typo

  2. #2
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    Quote Originally Posted by Red Uku View Post
    My question may seem naive, but I can't find for sure the answer. Everywhere how binary options work is explained from the point of view of the trader. How can such a system work if the broker is not also making money ?

    From my understandings : at no moment any money implied with this transaction is related to the market. I believe it is called an over the counter (OTC) transaction. So, from this angle, that's very like gambling with a casino, where the broker is the bank and the trader is the player.

    If it is the case, the trader is playing/trading against the broker. Unlike in trading forex, where the broker make profit with the spread, whether the trader is making gain or loss.

    So, like a casino, if the broker wants to make profit out of these binary options transactions, his overall clients losses has to be higher than his overall clients profits.

    If my understanding is correct, I find hard to see how binary options can be the next big thing : like in a casino, the trader's interest is against his broker's interest. So if traders are getting better, the broker will have to lower the potential gains or too good traders may even get tossed out !

    I know markets works on the same principle that someone's profit is made of others losses, but the broker is just a proxy, not interfering with his client interest.


    Am I correct on the mechanism of how binary options transaction work ?
    What are your opinions on the consequences ?
    Most binary option broker are a scam. They need traders to make a deposit and lose trades in order to make money. For example you place a $100 trade and the payout is 75% which means you will earn $75. Another trader places a $100 trade and records a loss. On those two trades the broker made $25. Stay away from those brokers. There is only a handful of quality binary option brokers in the market.

  3. #3
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    Apr 2013
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    Quote Originally Posted by TheLastBear View Post
    Most binary option broker are a scam. They need traders to make a deposit and lose trades in order to make money. For example you place a $100 trade and the payout is 75% which means you will earn $75. Another trader places a $100 trade and records a loss. On those two trades the broker made $25. Stay away from those brokers. There is only a handful of quality binary option brokers in the market.

    I agree with your example. Based on this, how can even an honest broker make money if his clients are good traders ? Is binary options based on the same concept as casino ?

  4. #4
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    Quote Originally Posted by Red Uku View Post
    I agree with your example. Based on this, how can even an honest broker make money if his clients are good traders ? Is binary options based on the same concept as casino ?
    No, they are nothing like casinos. I think the big binary option brokers have liquidity agreements with bigger exchanges. I could be wrong.

  5. #5
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    Hi Last Bear and Red Uku,
    Its all public knowledge now Binary is all about betting and the fact that the brokers use trading terms
    makes it a disguise. Just checkout their adverts on Youtube or better still give one of them your phone number and you will
    realise that they are snake oil salesmen..
    As a trader I believe in hard work and a trader doesn't just make it overnight. If you intend to trade binary, keep in mind that the house never looses.

  6. #6
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    There was another thread about someone doing binary trading and based on the numbers he gave, it seems like gambling. Said that if you won you received 170%, if you lost you got 15% back. 70 win vs 85 loss so 15% edge for the broker, based on a 50/50 outcome in that scenario.

  7. #7
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    Quote Originally Posted by GRIX FX View Post
    Hi Last Bear and Red Uku,
    Its all public knowledge now Binary is all about betting and the fact that the brokers use trading terms
    makes it a disguise. Just checkout their adverts on Youtube or better still give one of them your phone number and you will
    realise that they are snake oil salesmen..
    As a trader I believe in hard work and a trader doesn't just make it overnight. If you intend to trade binary, keep in mind that the house never looses.
    No, it is not all about betting. I have been 'trading' them. You just need to understand how to trade them. Most people think forex trading is betting simply because they do not grasp how to trade successfully. I do agree that the advertisement are very misleading and nothing but lousy sales pitches.

  8. #8
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    Hi Bear, PM me your track record maybe you can help me think otherwise about this ''too risky'' business

  9. #9
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    Quote Originally Posted by GRIX FX View Post
    Hi Bear, PM me your track record maybe you can help me think otherwise about this ''too risky'' business
    Hi, why would I do that? You think it is gambling, betting or a rigged game and you are free to think that. I am not here to share my strategies with anyone. I am here to give my opinion and offer general help where I feel it will make a difference. The best I can tell you is that if you think they are too risky for you, then don't trade them.

  10. #10
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    Hello.

    Well not to upset anyone here but from my experience (testing / demoing a few of them) some time ago: MOST Binary Option Brokers are the FOREX Broker equivalent of a "bucketshop". You lose: they make. Simple as that. To make matters worse: take a GOOD look at the Binary Option Broker i.e. do a "trace" and you'll find that they're nothing more than a "front" for one of only two or three "behind the scenes" BIG Binary Option Brokers or "bucketshops". Kinda like your FOREX Broker equivalent of a "White Label Partner" (they're called "Affiliates" if memory serves me correctly). I started a thread around here quite a while ago about these things (look for it if you're interested). The BIGGEST "move" that they "pull" is to NOT CLOSE ("expire") the option "dead on time". MANY times in my testing / demoing did I find, for example, that had the option expired EXACTLY on time I would have been "in the money". But thanks to the 45-second (at LEAST) delay AFTER the option was supposed to expire I ended up "out of the money". That type of thing. One would THINK that at very LEAST they'd ensure that you WIN on the DEMO!!! LOL!!! And just you TRY to "call them on it"!!! Good luck with that!!!

    I also seem to remember somebody working out "mathematically" that the risk/reward ratio and/or "mathematical odds" are not in your favor (I think it's somewhere on the thread that I mentioned that I started some time back but I could be wrong).

    ALL of this (the above) being said though: I HAVE noticed that, of late, some "alright" FOREX and CFD brokers are offering Binary Options as well. Hell: there's even a REGULATED (USA) Binary Option Broker now i.e. "NADEX" if memory serves me correctly!!! Is it "trading"??? It's debatable ACTUALLY. I mean let's be honest (and "all things being equal"): how DIFFERENT is it from trading a 15-minute chart with a SL and a TP in place??? Don't get me wrong. I wouldn't get "involved" with these things with somebody ELSE'S money LET ALONE mine. But think about it is all. ONE thing that you WILL notice (well that I noticed anyway): a few of the HIGHER PROBABILITY types of Binary Options have been "done away with" e.g. those "Once Touch" Binary Options (well: at the "bucketshop" level anyway). Why??? It's PRETTY SIMPLE and a NO BRAINER that during a news data release there WILL be a "spike" and of course your "One Touch" Binary Option will immediately expire "in the money"!!! Go figure.

    Anyway: "each to their own" as they say.

    Put another way: if they work for YOU then great!!! I have this "argument" ALL of the time (well: at LEAST once per week). Everybody that's been around here for a while knows that I wouldn't trade FOREX if you PAID me to do it. I trade only equities and commodities and that works FOR ME (and others that "see the light")!!! LOL!!! My argument (that could be applied here): WHO CARES WHAT you're trading just as long as you're making money. Alright: it does help if you're trading a particular market where the "odds" are stacked MORE in your favor than another of course. But as I said: "each to their own". A quote from "Floored The Movie" (a documentary actually): "Always be making money"!!! That about "sums it up" I guess.

    Regards,

    Dale.

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