Don't Gamble On Binary Options
There are lots of ways to lose your money in this world but here’s
one I hadn’t encountered before: binary option Web sites. They have
become popular over the past few years with new ones appearing all the
time: anyoption.com, bulloption.com, spotoption.com, binaryoption.com,
etc. etc.
The sites appeal to the same type of people who play poker online.
But they somehow have an aura of being more respectable because they
represent themselves as offering a form of investing. Don’t kid
yourself. These are gambling sites, pure and simple. It’s probably just a
matter of time before regulators move in on them.
Until that happens, they seem to be doing great business. A
Google
search for binary option Web sites produced 870,000 hits with
promotions like “earn up to 75 per cent every hour” and “81 per cent
profit in one hour or less, trade all major markets”. You can buy these
options,
which are also known as all-or-nothing options, digital options, or
Fixed Return Options (FROs), on stocks, commodities, indexes, foreign
exchange, and other derivatives.
In fact, you can place a bet (which is what it really amounts to) on
just about anything that is publicly traded, depending on which Web site
you use (some offer a wider range of choices than others). Some sites
provide free guides to binary option trading to get you started.
I was alerted to this phenomenon by a reader who sent me this email:
“My dad has recently gotten involved with trading binary options
online. The basic premise for the site he uses is at a specific time,
say 1:25 p.m., you can put down perhaps $100 that XYZ stock will either
increase or decrease in price within five minutes—by 1:30 p.m. If you are wrong, you get $15 back. If you are right, you win about $70.
“I’ve proven to him that, mathematically, the site has an edge
and you must be right 55% of the time in order for your bet to have a
neutral expected value. I am also a professional online poker player by
trade so I have an extensive understanding of probability, the online
gambling markets, and how these sites work.
The problem is he feels he is at a great advantage, citing his
ability to read a bunch of charts, follow news, etc. He is a smart man, a
former lawyer, and has been following stocks for years, but I feel that
he may be overestimating himself here. I’ve looked into online binary
options trading a bit and it seems to me that the consensus is that very
few people outside of professional traders can beat the trading sites
consistently for good money. My dad is up $2,500 or so betting $100 and
$50. The best I could do is to warn him about statistical variance
affecting his perceived ability and that short-term volatility along
with the inherent disadvantage will make consistent winning incredibly
hard.
“I’m looking for a way to definitively convince him to stop and
that his edge isn’t as great as it seems. I tried talking to him
multiple times about the subject but I’m not as knowledgeable about the
field and ultimately that becomes my shortcoming when trying to convince
him why he shouldn’t continue to be involved with this. Any help would
certainly be appreciated.”
I found this correspondence especially fascinating because the writer is a professional online poker player
—a
gambler by trade. Yet here he is trying to convince his dad that online
gambling is a bad thing. I agree, it is. But it’s understandable if the
father is skeptical about advice from a son who does the same sort of
thing, albeit in a different form.
But that’s for them to sort out. What intrigued me was to discover
that binary option trading has become a kind of pseudo investing
sub-culture. I went to the site our reader says his dad uses and did
some research. It describes binary options as “an exciting new type of
investment”
—note the use of the word “investment”.
“When a binary option is purchased on our platform, a contract is
created that gives the buyer (known here as the investor) the right to
buy an underlying asset at a fixed price, within a specified time frame
with us, the seller,” the Web site explains. The option must be held
until maturity (even if that is five minutes away); unlike regular
options it cannot be sold before then.
These sites promote themselves as offering controlled risk (you can’t
lose more than a specified amount), low cost, big gains if you guess
right, and ease of use
—you can trade from home whenever markets are open and set up an account with a credit card.
So what arguments would I use to convince dad to quit? For starters,
this sort of thing can quickly become addictive, especially to market
junkies. Although the amounts bet may be small, the total can quickly
add up if many trades are done in a day. It wouldn’t take long for
things to get out of hand.
Second, no one, no matter how knowledgeable, can consistently predict
what a stock or commodity will do within a short time frame. Will
Apple (
AAPL)
shares go up or down in the next 10 minutes? Unless there has just been
some major announcement from the company, there is no way to even guess
at that
