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Binary Options: Living Up to the Hype
If you use the web for financial and investment information you have probably seen some astounding
advertisements promising astronomical short term investment opportunities. Some of the more recent
claims are "up to 95% profit in one easy trade," "Earn up to 85% per trade," or "Win up to 88% per
trade." Are these types of claims accurate? Does the world of binary options live up to the hype? We will
explore this question in this report.
What is a binary option? Perhaps it is best to define the word 'option' first. An option is simply a
financial contract where we agree to buy or sell some sort of asset at a certain price within a certain
time frame. Options fall into the derivatives category because such a contract has a value without
actually holding the underlying asset itself. For example, if you own an option contract for Apple or
Google, that contract has value all by itself, despite the fact that you own no shares in the company. The
mere fact that you have a contract to buy or sell shares in the future has a value in and of itself. Option
contracts expire at some time in the future - minutes, hours, weeks, months or even years, depending
upon the particulars of the contract. Upon expiration, an option contract becomes worthless. So those
who invest in options must do something with them, buy or sell, sometime before they expire.
A binary option is a highly specialized option contract which cannot be sold after purchase. This type of
option is simply held by the purchaser until it expires with a predetermined profit or loss. The
advertisements that describe a 90% profit simply describe an option deal whereby a 90% profit (or loss)
would be generated if the underlying asset performs in the manner that you predict. For example, let's
say the Dow Jones Industrial Average opens up at 16,501. You think it will close higher by the market
close. So you decide to purchase a $500 call (upward price expectation) option with an end of day
expiration. The day grinds to a close with the Dow closing up one point at 16,502. Your option contract
appreciates in value by 90%. Thus, your $500 appreciates to $950. If the DOW closes down, you lose the
contract and will lose most of your $500. Some brokers will give you back 15% on losses. But this type of
option is binary in nature, meaning you will either win or lose at the time of expiration. Some have
described this type of option like throwing money on red or black at a casino. This is a fair description.
Yet most option investors would like to believe they are much more skilled than gamblers who play the
Binary options have been around for years as private over-the-counter deals. These exotic options were
first introduced to the general public in 2008, when the brokers started offering the deals online. Today
there are dozens of brokers who specialize in these exotic options. Most of these are located offshore in
places like Cyprus and the British Virgin Islands.
Are binary options legal? Like most legal subject areas, the answer is not simple. Most of the binary
options brokers operate in locations outside of the jurisdiction of securities regulators. Some of them
operate under casino gaming licenses. There is now a CySEC (Cyprus Security and Exchange Commission)
which is attempting to regulate the industry for those brokers within that jurisdiction. In the United
States there is a relatively new broker called NADEX (North American Derivative Exchange). This firm is
fully regulated by the Commodities and Futures Trading Commission, a US government agency similar to
the Securities and Exchange Commission. Binary option investing is so new that it will take some time to
see how the regulatory environment actually pans out. Certainly it is fair to say that the legal trend is
toward fully regulated firms which offer exotic option investment opportunities to eager clients within
Before we look at the upside of binary options let's take a look at the downside. Exotic option investing
is not traditional investing. Some say it is very similar to gambling. I like the red/black roulette wheel
analogy. When you acquire a binary option contract it will either win or lose at some point in time,
depending upon the expiration time of the deal. Many of the option brokers now promote 60 second
contracts. A fair assessment would be to call such a contract an investment/gambling hybrid. In fact, it
could be argued that any Wall Street investment is really nothing more than an elaborate gambling
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