Binary Options. Beware!

[dpaterso]

This may appear to be a strange post coming from me (most of them of late are I guess) but I feel I need to make our community aware of the latest 'fad' ('scam'???) in markets. I'm quite surprised that this has only been mentioned once on BabyPips as far as I can remember and if I remember correctly the poster never got any answers and I 'stayed out of it'.

But this morning I just happened to 'mosey on over' to AskPips.com and answered a question about trading platforms (the only reason I answered was because, from her profile picture, the person asking the question, was 'not too shabby') and underneath her post I saw that somebody had suggested to her to go and look at Binary Options.

Now let me tell you from (demo) experience: if you think that trading (FOREX or anything else) is 'gambling' you ain't seen NOTHIN' yet. I found out about Binary Options last year when I was TRYING to set up a training school for our 'less fortunate' (it's a long story) and at the time a lot of my 'students' discovered these Binary Options. Of COURSE: instead of wanting to learn to trade and when being told that they'd probably have to hold a trade for a few days to make a profit (maybe even a few weeks or even a few months) my training courses 'never stood a chance' because Binary Options offer huge gains on very short 'timeframes'. What's more: the amount of profit is known up front and so is the cost of the Binary Option (which really represents your loss if the Binary Option expires 'out of the money') which is fair enough. There's nothing wrong with the CONCEPT and as a matter of fact: if you do a bit of research you'll quickly find that they are legitimate trading vehicles and a method of limiting risk on 'normal' trades e.g. you may go long a certain instrument but 'hedge' the position using a Binary Option the idea being that if your 'normal' trade goes awry the Binary Option will expire 'in the money' and thus your loss will be reduced. Of course: if your 'normal' trade is profitable then you will lose the cost of the Binary Option thus reducing your profit (but as we know: a small profit is better than a HUGE loss). As a matter of fact: the CBOE of all places offers Binary Options!!! So far so good. But NOW 'enter the Binary Options Brokers' and the picture changes somewhat!!!

To prove a point (last year) I opened demo accounts with a lot of Binary Options Brokers. To be honest and if everything was run legitimately: a short-term trader (somebody who's a 'whiz' at being profitable on short timeframes like the 15-minute timeframes) should be able to make a small fortune because really all you're doing is predicting where price will close after a 15-minute period. So if you can read a 'normal' chart (all Binary Options charts are web based and are our equivalent of tick charts or possibly 1-minute charts) you should be able to make a 'killing'. But HERE'S the problem!!! It didn't matter WHAT Binary Option Broker I was demo trading with: if the Binary Option was supposed to expire at, say, 10h15, 'on the dot', for SOME reason or the other the Binary Option was kept open until, say, 10h16, and, OF COURSE, that last minute was JUST enough for your Binary Option to expire 'out of the money' ALMOST ALWAYS and THAT was on DEMO accounts so I can only imagine that the live accounts would be even worse!!! In other words: had the Binary Option closed at EXACTLY 10h15 (in the above example and as it should) it would have expired 'in the money' but by the broker 'delaying' the expiry time of the Binary Option the Binary Option would inevitably expire 'out of the money'. This is our equivalent of 'bucket shop brokers' holding profitable positions open until they've turned to losing positions and only THEN closing them out. In each and every case I sent emails asking WHY at the time that the Binary Option was SUPPOSED to expire it would have expired 'in the money' (profitable) but it only expired 45 minutes later 'out of the money'. To this day: I've never received ONE single reply from any of these brokers as to 'why'. What's more: in my 'investigations' at the time I found that there really are only one or two Binary Option Brokers (let's call them 'Retail Binary Options Brokers') (well other than the 'real' Binary Options Brokers like those that are recommended by the CBOE). All of the others are merely our equivalent of Introducing Brokers or White Label Brokers (the software is re-branded) for these one or two 'Retail Binary Options Brokers'. What concerns me even more is that of late: the 'pop-up' ads for Binary Options are 'popping-up' more and more.

So there's my 'take' and my warning about these things. I'd be keen to know if anybody here trades Binary Options and if so how they're doing. (And that's not an invitation for the Binary Options Brokers to 'create' 'members' here and have these 'members' tell everyone how well they're doing)!!!

Regards,

Dale.

[rhodytrader]

To pick up on Dale's warning, I'll toss in my own. Binary options are mostly gambling and as such the house has put the odds in their favor. That means they're computers set the pay-outs such that in the long run they are going to win based on their calculations. Take a look at those payouts and figure out what kind of win rate you'd have to achieve to come out ahead. This isn't to say it's impossible. You just have to be very realistic about your chances and realize the margin of error will be small.

[dpaterso]

Yeh and what kills me is that the advertising campaigns and promises of high returns in short periods of time is going to give yet another legitimate trading vehicle (market) a bad name. Try and convince someone that they should trade FOREX, equities, or commodities, and 'pat themselves on the back' if they're making a consistent 10% per month, while these Binary Options 'Brokers' are advertising 'make 81% in fifteen minutes and your risk is limited'. That's not an 'easy sell'. And of course: by the time they've found out what it's all about themselves they've got no capital to open a 'real' trading account and learn to trade!!! LOL!!! I saw it happen to a few individuals last year but 'oh the power of Internet Marketing'!!! But again I suppose it's much the same as this business really i.e. it's broker dependant. All these Binary Options 'Brokers' have done is convert a legitimate form of Option (I think it's called a Vanilla Option or something like that) into some 'quick money making scheme' (for them of course). As I said: I did note that they are indeed a legitimate trading vehicle but not these 'get rich quick in fifteen minute' type things i.e. there are 'proper' (for want of the correct word) Binary Options that can be used to limit risk and may have expiration periods of weeks and even months.

Regards,

Dale.

[Mcserastral]

Hi, just wanna ask whether binary options = forex options??

Sry for the nuub question as i am still newbie.

[fxvoilaaa]

i think they're overrated personally.

[dpaterso]

That's pretty much what they are but they're not only limited to FOREX.

Just Google 'Binary Options Broker' and you'll come across many. There are different types of Binary Options offered as well e.g. price must close above or below a certain price at the time of the expiry of the option (but you cannot 'choose' the prices i.e. they GIVE you the prices based on their 'spread' and note that this is not the same as what we know as a 'spread'. It's more of a 'range' that somehow they calculate). Another 'version' is that price only has to 'touch' a certain upper or lower price within a certain time period (again they calculate the 'range'). And there are various other type of these things available.

Put it this way: if it were run 'honestly' or 'transparantely' it could be a good way to make money especially if, as I said, you're 'pretty good' at taking profitable positions in 'normal' trading on short timeframes. And the, let's call them 'proper' (Binary) Options Brokers will allow YOU to specify the price 'ranges' and therein lies the difference. These, let's call them 'Retail Binary Options Brokers' (I believe) carefully calculate those ranges and / or manipulate the closing (expiry) time of the options and believe me NEITHER is designed to assist you in being profitable. The main problem with these type of brokers is that there's no price reference point. I'll guarantee you that there will be 'every reason under the sun' as to WHY as far as YOU were concerned your Binary Option expired 'in the money' but there'll be an explanation (price spike??? Internet connection speed issue causing a delay???) as to why it didn't. I mean: a short delay in closing the option or a single tick seconds before the expiry of the option will make the difference between closing 'in the money' or 'out of the money'.

Also (and I think this was one of the things John was addressing): the 'odds' are 'mathematically stacked' against you. In other words: the loss (cost) of the option will always exceed the possible gain if the option expires 'in the money' unlike with 'proper' trading where there really is no limit to the amount of profit that you can make on a trade while still fixing your risk / stop.

And don't get me wrong here: I must have messed about with this stuff for about a month and couldn't believe how my demo accounts were growing at the time IN SPITE of the 'shenanigans' that I saw being 'pulled' and never got answers to. But I'll wager that the live accounts are manipulated with far more of a concerted effort.

All I'm saying is that they are indeed a viable and legitimate trading vehicle and a method of limiting risk and minimising losses on a 'directional' trade (trend trade) that went awry. But NOT at these 'make a million in five minutes' brokers. I've got no 'axe to grind' with any of them because I've not put one single LIVE cent into them. It's just something that I've noticed appears to be gaining in popularity because on an intense advertising onslaught (much the same as with FOREX trading when it started becoming popular).

On the other hand: if you really think about it they're nothing different than trading 'normally' but with a bad risk / reward ratio e.g. risking 100 points (pips) to make 20. That type of thing.

Anyway: I just thought it's something that would be worth a mention is all. All I know is that I saw some serious manipulation on DEMO accounts (now how dumb does a person have to be to manipulate a DEMO account i.e. at LEAST with (SOME) FOREX brokers it's the OTHER way around)!!! LOL!!!

Regards,

Dale.

[Shr1k]

the loss (cost) of the option will always exceed the possible gain if the option expires 'in the money'

The above is not correct with the broker I have tried this with. The big catch here is the probability of winning goes way down as your Risk/Reward gets better. You have to get lucky to win. It is more like gambling.
I do think it could be an ok way to trade news if you understand the risk. The elimination of a price level stop but still trading with limited risk seems a good way to go when crazy whips and moves are probably going to happen at a news release. Even that sounds a little better then it is in practice. A news release is known and volatility at a certain time can be predicted so that's all factored in to the binary markets around newstime. I do have a real account at a binary broker and have traded news like this. I like the betting/gambling aspect of "trading" like this. I don't consider it a very serious way to trade but its fun to watch a chart go crazy at news if some coin is riding on it .
I have not tried to figure it out but I bet you could make a pretty good spot FX strat by looking at binary strike prices and the prices the contracts are being traded at. Could be fun for a number cruncher to work on.

To go along with what Dale said about longer term contracts like daily and weekly.
That does seem to be the way to trade these things. The manipulation of the prices seems like it would be less of a percentage of your position. If you are talking about winning a 15 min binary by 2 pips or a daily binary by 50 pips it would look pretty fishy if the brokers price feed was 50 pips out of wack with every other price feed on the planet, but you may never notice a pip here or there and a few pips here or there on a bunch of 15 min contracts could make someone a ton of money. That would be the broker not you the trader.

[dpaterso]

Good morning,

As always: the voice of reason!!! LOL!!!

How are you???

Mabe my wording was bad because if I read your quote of you quoting me it doesn't makes sense does it!!! LOL!!!

What I was ATTEMPTING to explain was: let's say the Binary Option cost you $100 and as per their advertising or 'guaranteed gain if it expires in the money' (or however they put it) you could never make MORE than the $100. For example: the ads I see 'popping up' the most of late are from WinOptions. The ads normally say 'make 81% in less than an hour' (something like that). So the MOST you can make if the option expires 'in the money' is $81 and your (maximum) possible loss is the cost of the option which is $100.

BUT NOW you've just 'opened up my eyes' to something that I would never ordinarily thought of (given that I don't even LOOK at an economic calendar let alone try to trade the news)!!! BUT: if you're a fairly decent news trader could you not make some good money by takig a 1-hour 'One Touch' or 'Touch' (whatever they're called) Binary Option??? I'm sure that YOU know what this means but for the benefit of others: all that has to happen is that price has to 'touch' a certain price anytime during that 1-hour period and the Binary Option expires 'in the money'. The only drawback (if you can call it that) is that the closer to the expiry time you 'buy' the option the less the profit percentage becomes (and I'm not sure if the cost of the option reduces although I don't think so). Is that what you were trying to say???

Put another way: for a GOOD news trader could these things not be a 'God send'??? (I cannot believe I'm even MAKING that statement especially given the reason I started this thread but hey: I've got no problem in 'being wrong' if I am wrong)!!! LOL!!!

Very interesting.

I hope to hear more from you on this. (NO: I'm not going to try it i.e. what I do works for me and and I'm sticking to it no matter what but maybe I've inadvertently overlooked something that could MAYBE make a bit of cash for others).

I'lll tell you one thing: from the junk emails I get from these companies they sure do appear to have 'affliate programs' that 'knock the socks off' of those offered by 'proper' brokers e.g. $125 per 'introduced client'. Stuff like that in and of itself has always 'put me off' and 'raised the red flag' but who knows: maybe it works.

Regards,

Dale.

[wirefax]

Anybody can say that this binary options?*

[dpaterso]

Huh???

I don't understand your question. Please explain further and I'll try to help but please do note that I myself am NOT encouraging this type of 'trading' (I don't believe it's 'trading' at all) but Shr1k has made a good point that I'm keen to discuss for interest sake.

Regards,

Dale.

[elsielefe]

A Binary Option is best described as a the type of option where the return is seen as one of two positions, either a fixed amount of some asset or nothing at all.

[dusktrader]

I think Oanda's "boxes" are the same as binary options. Can anyone confirm?

[Shr1k]

I think Oanda's "boxes" are the same as binary options. Can anyone confirm?

Yes very similar with the same pricing that favors the broker. A "Box" is drawn by the trader it can be a hit or miss box, depending on how the box is drawn it can be just like a regular binary.

[fihunts]

I think I'll just stay away from them and stick to Black Jack when I want to gamble.

[dpaterso]

Hello,

Well I don't know anything about Oanda's 'boxes' but Shr1k's earlier reply that included a note about trading the news is what captured my interest after I'd just 'slated' these things!!! LOL!!!

By the way (just to explain to those that may be interested): they're called Binary Options after the Binary Numbering System in which the numbers are either ZEROS (0) or ONES (1). This pretty much is the way that computers 'understand' things at the end of the day and a ZERO (0) in a Binary Number means the 'Bit' is (turned) off and a ONE (1) in a Binary Number means that the 'Bit' is (turned) on. In other words: it's an 'either / or' outcome is all unlike with 'normal' options where there are a great number of complicated permutations (well I say complicated because they've been explained to me at length and I still don't get them)!!! LOL!!! So there's a little bit of useless information. Although I do believe (possibly understand???) that they're not that far removed from what are called a 'Vanilla Option' (don't ask because I don't know)!!! LOL!!!

As I said: I believe (based on my messing about with them and what I've read) they are legitimate trading vehicles and, logically speaking, should be 'the ticket' for a news trader i.e. for one thing you don't have to worry about slippage theoretically i.e. as long as the price touches the predetermined (available) price made by the Binary Options Broker (perhaps therein is where the 'catch' lies) then the Binary Option expires 'in the money' and, again, theoretically, there can be no argument about it. My problem is that with the small amount of 'playing around' (demoing) these things I saw things at various brokers that I just didn't 'like' but I'm pretty sure that there are indeed some regulated Binary Options Brokers out there.

Regards,

Dale.

[fasmail2005]

Hi Dale, hope you are doing well, nice to see the amount of experience that you have in forex. i have started my school at baby pips.com to learn to trade however i am finding it tough thou. i am also residing in johannesburg and would like to know if you can give me some advice on forex trading. looking forward to hear from you.

Regards

Faisal

[vosterfxandy]

A Binary Option is best described as a the type of option where the return is seen as one of two positions, either a fixed amount of some asset or nothing at all.

Yeah, that's what I'm gathering. But it just seems another way of pulling some money.

[dpaterso]

Faisal,

My man!!! Johannesburg!!!

I'm not sure how to answer you though. If I go into my trading equities and commodities vs. FOREX argument here I'm going to 'knifed' as usual!!! LOL!!! Which is only fair I guess given that this IS a FOREX site.

Put another way: if you want advice and input from ME then it's better you go and visit my homepage (click on my username 'dpaterso' and then on 'Visit Homepage') otherwise I'm going to get into a trouble here AGAIN!!! Bottom line: I don't believe FOREX is 'the way to go' (that's the statement that usually gets me into trouble). Although I CANNOT tell a lie (to everyone else): I am INDEED keenly watching certain FOREX pairs at the moment for some L-O-N-G term trades (but I guess they won't interest anybody here either given that they are 'exotics' and have spreads in the region of 400 pips or more etc.)!!! LOL!!!

But I'll help you as best I can either way / any way so if you've got particular questions then feel free to ask. You're very lucky in the sense that you've found this site (PITY IT LACKS AN EQUITIES AND COMMODITIES FORUM)!!! LOL!!! There's some very good, honest, experienced, and knowledgeable FOREX traders around here who are only too keen to help.

vosterfxandy:

I agree with you BUT as I noted: I do believe that it's MORE 'broker reputation' dependant than is 'normal' trading and therein lies the problem. I'd be real keen to see how they operate during news releases on LIVE accounts (but I'm certainly not going to put $1 000 into an account to find out)!!! LOL!!!

As I said: THEORETICALLY they should be a news trader's dream (and remember this coming from somebody that started this thread to initially tell people to stay AWAY from them but I never thought about the news trading possibilities). Also, and if you're good at studying price action and price action alone I don't see any reason why they cannot work. As I said: it MORE so than in 'normal' trading depends on the broker I think. As I noted: I started seeing 'moves' even on demo accounts that didn't make me feel comfortable and one can only assume that if these 'moves' were evident on demo accounts then live accounts would, theoretically, be even worse especially if you're actually making money.

Regards,

Dale.

[purplepatchforex]

Only 10 types of people in this world, those who understand binary and those who don't

[dpaterso]

TOO clever!!! LOL!!!

Well done!!!

Regards,

Dale.