Image by: clry2
By Mike Ventura
Being from Las Vegas I know a few things about gambling. For starters, I am no good at it. I’ve learned that if I ever wanted to win anything from the casino, I would either have to lose a lot of money first, or get good at the nuances of each game. I had other things going on so that never panned out, and probably for the best.
Then just recently I heard about this mysterious investing concept known as binary options trading. I am usually pretty good about spotting scams so I had to investigate. My first impression was that it sounded a lot like betting. It works like this:
You place your bet, or call, on an option of your choosing and pick a designated time for the bet to expire. You can also choose a put option. The difference is that with a call you are predicting that after the time expires the stock price will rise, and with a put you are predicting it to fall.
Apparently the markets for binary options have existed since the 1970’s and were unregulated until around 2007. After the housing market fiasco of 2008 and the fallout from that whole mess, international trading authorities began to crackdown on everything, including binary options trading.
Either way, I was intrigued after the first page as they say in the publishing world. At least I think that’s what they say. So if you’re also curious, then allow me to further expand on a few points you will need to know should you embark upon your own investing endeavors with binary options.
#1) Are You a Bettin’ Man?
Like I said before, the whole concept is really like gambling, roulette to be specific. I mean the whole idea is based on a one time win or lose scenario.
Unlike the casino, however, there are two types of payouts. If you are trading what is known as a cash-or-nothing option then you’re dealing with straight money. If it is an asset-or-nothing option then the payoff would be the value of that asset’s derivatives.
Say you are going to put up a $100 call option on a stock that has a binary payoff of $1000. You just made a bet that the stock you bought will increase in value by the time the bet expires. If you are right and the price goes above $100 in value at the expiry date, then you my friend are what they call “in the money.”
Now I of course just super simplified the whole process, but this is basically how it works. You can also make the same exact purchase as above, but instead of betting the stock will rise, you can predict it will sell for less than $100. And if it does indeed fall, then you just profited $900.
Remember though, if your bet does not have the outcome you picked, then you lose all the money you paid for that option, and you are now in the sad state of being “out of the money.” Where someone wins, someone loses, and vice versa.
#2) Is It Legal? And Is It Safe?
First, yes it is legal. The majority of brokers are overseas, but there are also many reputable companies state side as well. The markets have existed since the early 1970’s and were treated as financial instruments. Due to the unregulated nature of the markets and the lack of a solid framework in the beginning, many investors referred to them as “exotic” options for the longest time.
Over time the system evolved and actually became a nice alternative for investors looking outside of the traditional avenues. It was easier to navigate and the process proved much quicker than playing the stock market, but it was still unregulated.
Many of the companies overseas that were involved in unscrupulous trading activity have slowly been hunted down by government regulatory commissions in recent years. The goal is to create a more stable environment that investors can feel safe investing their money in.
For instance, in Cyprus the Securities and Exchange Commission drafted a policy change that required all brokers dealing in binary options to become CySEC certified within 6 months of the rule taking effect. Malta soon followed as they reclassified the practice under the financial instrument category, essentially making the same requirements for brokers to get certified.
BinaryOptions.net noted that In 2008 the United States Securities and Exchange Commission, “made it legal for binary options to be offered on major exchanges as a stand-alone, tradeable financial instrument. By May of the same year, the American Stock Exchange (AMEX) started offering binary options to the public for the first time, and the CBOE followed suit the following month.”
OK, so now that we know it is indeed a legal practice there is still the question of whether or not it is safe. That, unfortunately depends on your own amount of diligence and research. Do you feel safe when you place a bet at the casino? I guess that depends on what casino you’re in of course.
To get a little taste of a legal and safe place that you can at least inform yourself a little bit more, head on over to Chuck’s House of Binary Options and poke around. I have yet to throw any money into the game myself, but when I do I will report all of my findings as dutiful as I can.
#3) So, What’s the Catch?
There is no catch. Just like the allure of a casino, a stock market, or a back ally game of dice, there are no guarantees in life. Unless you are highly skilled at mathematics like those college students in the movie 21, you probably won’t be able to devise a foolproof winning strategy.
My suggestion is to educate yourself as much as possible about the concept and then start looking at reputable companies. I feel like this is something the average guy can tinker with and feel like an amateur stock trader. You might lose some money, but you might just be good at recognizing patterns and create your own system.
Are you familiar with binary options trading? Would it be something you could see yourself getting into? Am I missing something that you think is vital to know? Please share your comments and any experiences you might have had!