Jan 062014

The Binary Options Scam? Is There Really Such A Thing?

binary options scamOver the years we have come across a lot of misconceptions and misinformation regarding how binary options brokers make their profits. This was true when we wrote the first version of this article and it is unfortunately still true today (though to a lesser degree). Many people have voiced concerns that they are trading “against the house” and that because of that binary options brokers have an incentive to “fudge” the data towards favorable outcomes for themselves. People are constantly consulting google on things like “binary options scam” or “brokerX scam” etc. And unfortunately they stand a good chance of landing somewhere where the author is misinformed at best, and sometimes even downright deliberately dishonest.

The Binary Options Scam Revealed…

First things first: There is no industry-wide binary options scam folks. I can personally assure you of that fact as can tens of thousands of other people.

(This article does not mean, unfortunately, that there are no brokers out there that are unreliable and/or untrustworthy. There most definitely are such “bad apples” out there in this rapidly growing market niche. They come in two general types. One type that fails to establish a sustainable, competitive business and instead of simply closing up and accepting losses, turns to shady practices in an attempt to recoup some or all of those losses first. These dishonest “brokers” are the worst of the worst and, thankfully, are relatively few in number. The second type are more common and are simply poorly run by ownership/management that has no idea what they are doing and have no business being in the market in the first place; resulting in an unreliable, but not purposely dishonest broker. However, this unreliability can be just as costly to clients as deliberate dishonesty.)

Q.  Why should it be obvious that there is no widespread binary options scam with all these brokers systematically ripping off their clients?
A.  Because there is a perfectly legitimate and highly profitable long-term business to be made based around binary options trading — as with any other kind of trading — and the short-term gains to be had from defrauding customers pales in comparison to the long-run profits that can be made by running a legitimate, competitive binary options trading platform.

Binary options have also been traded for decades by institutional investors and investment banks. Not exactly institutions prone to being fleeced by some fly-by-night scam are they? Binary options are only new to the retail trading scene and retail investors. The Wall Street big shots have been playing the binary options game for a very long time. Now us mere mortals also have a chance at it.

Logical exercises and history lessons alone not enough to convince you that there is no widespread binary options scam? Nothing wrong with a little healthy skepticism.So then lets take a close look at how these binary options brokers actually DO make their profits shall we?

How The So-Called Binary Options Scam Really Operates

The binary options scam works much like the fast food hamburger “scam” or the luxury BMW “scam” works. By providing a product (or in this case a service) which consumers want at a price above company expenses. Considering the confusion that reigns supreme in this area, however, we think that maybe a little more detail than that lighthearted response may be in order. So now we are going to show you exactly how binary options brokers make their money. It’s really not overly complex and we’ll do a quick example as well.

Binary Options Broker Profit = – [Volume Wins*Probability Of Win (ITM Payout % – 1) + Volume Losers*Probability Of Loss (OTM Payout % – 1)]

ITM = “In-The-Money” – We have a winner!
OTM = “Out-The-Money”  – Better luck next time!
Probability = 0.5 in both cases in this equation (Win, or Lose. 50/50 shot in an efficient market)
For purposes of constructing our example below lets assume our hypothetical broker pays out 71% for ITM trades and 15% for OTM trades.
We’ll also assume even volumes of $50,000 in winners and $50,000 in losers (equal volumes being roughly accurate in any long-run measurement).

Now lets put these numbers to this exercise and see what happens.

Binary Options Broker Profit = – [50000 * 0.5 (1.71 – 1) + 50000 * 0.5 (0.15 – 1)]
= – [25000 (0.71) + 25000 (-0.85)]
= – [17750 + (-21250)]
= – [ -3500]
Binary Options Broker Profit = +$3500

And that, my friends is how the “binary options scam” works. A simple numbers game just like every other broker or bank in existence. If we wanted we could manipulate this equation and also derive from it exactly how often we as traders need to be correct in our trades to be profitable. We’ll spare you the work and just give you the answer: 54.5% (in a perfectly efficient market that is…hold the laughs).

We hope we have shed some light on this idea that there is some widespread binary options broker conspiracy – and shown this to be the silly idea that it is. But do remember that individual bad apples DO exist in this lightly-regulated market. Don’t register with the first pop-up ad a broker or website sends you, and do some review homework and you’ll be just fine.

Binary options are perfectly legitimate speculative vehicles which offer a unique risk/reward profile. Along with the potential for great reward, of course, comes great risk and binary options trading is not for everyone. And no one should ever speculate with money you cannot afford to lose.

CBOE (Chicago Board of Options Exchange)

Article from Justin Delano