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Binary Options: Trading or Gambling?

12 November 2012 2 Comments

The world of trading is laden with euphoric and horrid tales of success and world-crumbling losses. High highs and low lows; adventure and drama. It’s very typical in trading. And with the rising popularity of web-based binary options trading, we may not know even half of these stories.

A quick search on Google on the keyword “binary options” would return 17,700,000 results on my end and most of the top results are binary options broker offering promotions like “earn up to 80% of your investment in an hour or less” or “trade major markets”. If the search results are any indication, binary options are getting quite a following.

Binary Options: How Does It Work?

A typical binary options trade goes like this: say at 2:30 PM, you placed a $100 call option on stock ABC, thinking that the asset will go up in price in 30 minutes or at 3:00 PM. Now, if you are right, and the stock’s price did indeed go up, you will receive up to 70% returns of your money; in this case, $170 including your initial investment. However, if you are wrong, you end up out-of-the-money so you’ll get back 15% of your capital; in this case, $15.

For people who are into online pokers and such, you can definitely understand the appeal of binary options. For one, it sounds more respectable than flat out saying you’re into gambling. And with sites churning out words like “controlled risks” and “options contracts”, it does sound a level more estimable than poker. But is it any better?

Pros and Cons

For one, profits may be tempting. However, if you look at it in mathematical terms, the site has the upper hand in terms of probability. You would need to be right around 55% of the time just to break even. And seeing that there’s 50% probability of an asset’s price going up or down; mathematically, the odds are stacked against you.

Second, the main attraction of binary options trading is its simplicity. While it’s true that there are only two ways the price would move: up or down, there’s never any way to predict how it will move in the next 30 minutes or so. Again, it’s a complete coin toss.

And lastly, one of the most alluring features touted by most binary options brokers is how you don’t need much capital to get started trading binary options contracts. Thus, the risk and possibility of loss is not as gut-wrenching and mind-numbing compared to trading other underlying assets. Losses may come in tiny trickles but as with other addictive activities, those tiny trickles when summed up, could just be as painful.

Is it Trading or Gambling?

There are certainly some upsides to binary options trading like no commission fees, access to major markets, and you don’t have to concern yourself with liquidity issues. However, it does violate one of trading’s cardinal wisdom: reward has to be greater than the risk. Trading has and always will be about stacking odds in your favor through solidly devised system and careful analysis of charts and other variables that may affect the trade. It’s all about minimizing risks and maximizing rewards. Anything less than that is gambling.

 

Patrik Fonce is a trader and editor for QS Trading Software

 

2 Comments »

  • Aram Durphy said:

    You actually would have better odds playing online poker, where you play against others (not the house) and skill is the determining factor. Short term market movement is so random, binary options are more like playing roulette, where the house always wins.

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