Binary options are a type of high-risk financial instrument. They are currently banned in the EU where only professional investors are allowed to trade with them. Brokers are not allowed to offer binary options trading to retail investors.
They have been banned due to the fact that a very large percentage of all traders lose money and due to the fact that a lot of scam brokers scammed retail investors out of their money. The bad reputation combined with the low percentage of traders making a profit caused the European Union to ban them.
They are still legal in many other markets including the US and Australia.
Binary options trading can be profitable if you are willing to devote enough time and energy towards the trade. You need to be a skilled trader to be able to make money. Almost 90% of traders lose money.
How do binary options work?
Binary options are always based on an asset. It is the market value of this asset that governs the binary option and whether or not it matures in the money. A binary option can be based on almost any publicly traded asset but they are usually based on major stocks, currency pairs, commodities on indices. They are always based on popular assets that see a lot of trade and a lot of volatility.
The binary options broker decide which assets they want to base the binary options they offer on. The broker is the option underwriter and there is no third party involved in the transaction. There is no exchange where binary options are bought and sold. The binary option is a transaction between you and your broker.
The fact that the broker acts as the option underwriters means that they earn money if the option matures outside the money. They lose money if the option matures in the money. Or to put it another way. The broker makes money when you lose money and lose money when you make money. It is in the broker’s interest that you lose money.
The broker advantage
Binary options are designed to give the broker an advantage, to make the brokers money. This is achieved by the fact that the broker decides what is required for a certain option to mature in the money and by the fact that you lose all your money when you invest in an option that matures outside the money but only earn 90% or less if it matures in the money. You will lose money if 50% of all options mature in the money. You will need to pick options that mature in the money more than 60% of the time to make money.
The trader’s advantage
The trader has one advantage that he or she can use to nullify the brokers advantage and make money trading binary options. That advantage is that the trader can decide which options he or she wants to buy. By carefully studying the market and predicting market movements it is possible to choose options that are likely to mature in the money. Options that provide the trader with a positive implied value and that will earn the trader money over time.
Skillfully picking options is hard and require a lot of skill and dedication. This is why a large percentage of traders fail. They are unable to skillfully pick options.
Should you trade binary options?
It is possible to earn money by skillfully picking the right binary options, but I still do not recommend that you trade binary options. Doing so successfully takes a lot of time and effort. Time and effort that can be better-used trading other financial instruments such as CFD:s and forex certificates.
Another reason that I do not recommend that you trade binary options is that you can be correct in your prediction but still lose money when you trade binary options. You can correctly predict that an asset will increase in value but it does not increase enough in value for the binary option to mature in the money. In this case, you lose your investment. If you would have made the same investment in a CFD you would still have made a profit, even though it might be smaller than you had predicted it to be. A small profit is a lot better than a loss.