It is a rather one-sided market. But how do they work? Well, just like standard options they allow investors to place a bet on whether a particular stock – at a predetermined point in the future – will rest above or below a line drawn in the sand commonly known as a strike price. But unlike traditional options contracts, which provide a safer alternative to stocks, these all-or-nothing alternatives, expose investors to massive risks and minimal returns.
Binary options trading sites have grown in popularity among armchair investors, who like the allure and prestige associated with playing in the big leagues, but prefer the minimalism and effortlessness of betting that is reserved for online casino sites. Though these ominous options may look like an easy way to trade stocks. Those that do are more likely to find themselves with little but lint lining their pockets than they are of winning big. Binary options’ trading is more Fremont Street than Wall Street, with the sites responsible for pushing these junk instruments choosing not to generate revenue by traditional means, such as charging a commission fee. Instead, they make their profit from the ‘spread’ that exists between possible payouts and losses, stacking the odds in the houses favour. If investors intend on making any money at this table they are going to need skills that would put even Raymond Babbitt to shame. Even if you get the call right 55 percent of the time you will be lucky if you break even, let alone any sort of profit.
The fact that binary options customer base consists predominately of inexperienced retail investors, has had a big impact on the way these outfits choose to promote these financial abominations, with the marketing style for these toxic options drawing parallels with other ‘get rich quick’ schemes you see all over the web; promising everything and delivering nothing. Online adverts boast about how others are “earning over 70 percent every hour on the hour” in a desperate attempt to trick people into signing up. But at least their sad attempt at self-promotion helps expose these fraudsters for what they are, which is nothing short of con artists. That at least is the view now taken by regulators in several jurisdictions.
In order to protect investors from these cowboy casinos, regulators in the US decided to step in. And on June 6 2013, the US Commodity Futures Trading Commission (CFTC) issued an Investor Alert in an attempt to make investors aware of the dangers of binary options and the trading platforms that they operate on. Sadly, it has done little to deter people from throwing their money down the toilet.
It is common to see new financial instruments gain a bit of traction at inception because the initial excitement and lack of knowledge that surrounds them means that it often takes time for people to see them for what they really are, which is often worthy of contempt. Let’s hope that investors get wise quick before they end up losing too much of their hard earned money.
