Don't be fooled by the hype

Binary options are the simplest and quickest way to trade in financial and stock markets. You don’t need specialist knowledge, you don’t need a lot of money, the profits are virtually instant and you can trade from home. And, you know exactly how much profit you are going to make (or how much you stand to lose) the moment you make your trade.  But, is trading in binary options really investing or is it just another form of gambling?

Let’s first take a look at what trading in binary options means. Effectively, all you have to do is to decide if your chosen stock, commodity, exchange rate or market index will be above or below a set value at a given time in the future. If you are correct, you will be paid your initial capital plus a premium that is usually between 70% and 85%. If you are wrong you will receive up to15% of your outlay.

It’s that simple. If you think the value of your chosen asset will have risen by the expiry time, then you buy a “call” option. If you think it will have fallen, then you buy a “put” option. Given that the expiry time can be very short – often only an hour or two – it’s easy to see that you can make, or lose, a lot of money in a very short time.

Binary options might look attractive but if you take a few minutes to do some sums then the picture changes. Let’s start with an investment of $100 and assume that you are an excellent trader (which means a successful trade rate of about 65% to70% - i.e. win two, lose one).

In our first case we will only invest the principal and bank any profit, which we will put at the high rate of 85%. If we are lucky and make two consecutive successful trades, we bank $170. Say we lose on the third trade – this will leave us with, at best, $15. To trade again we take $85 from the bank (to bring our investment up to $100) but lose again. We recoup $15. This leaves us with just our initial capital after four trades. Of course, if we get the first trade wrong we have to come up with more capital to be able to continue.

Say we try a different tack and re-invest our profit with our initial capital. Two successful trades will give us $342.25 – not bad. But, if the next trade is unsuccessful, this amount reduces to $51.34 representing a loss of $48.66.

The picture now doesn’t look quite so rosy. Of course, it’s easy to bandy figures about and we all know how misleading statistics can be. The point is that trading in binary options is not the get rich quick scheme that some would have us believe. Essentially, it’s really a calculated bet and should be treated as such. There will be winners but there will be far more losers.

Anyone interested in trading binary options will find plenty of reputable brokers online. Most offer demonstrations of just how trading works and the best strategies to use to ensure the best outcome; the associated risks will be in the small print. But, don’t be sucked in unless you know exactly what you are doing and certainly do not invest more than you can afford to lose.