Are Binary Options a scam?

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Danny Fortson, wrote an interesting article in the Sunday Times about how binary options are the latest product used by crooks to scam investors out thousands with high pressure sales tactics.

So we thought we’d try and clear up a few things when it comes to Binary Options and if they are a scam or not…

Firstly what are binary options?

Binary options offer a simple way to bet on short term price movements in the financial markets.  You can place a bet as to whether a stock or currency will go up or down in a set time frame. The time frame can be anything from 30 seconds to 1 year.  The majority of bets are made in the short-term though as with all high risk trading the objective is short term quick fire profits.

Binary options differ from other types of leverage speculation like CFDs and spread betting because they are limited in risk.  With spread betting and CFDs you can short the market, which means your losses or profits are potentially unlimited. Depending on your margin of course which is the deposit you put down to trade on margin.  Trading on margin enables you to have significantly more exposure to an stock or currency than your deposit.  The deposit basically covers the movement the broker expects to see in a day and you either need to top it up or get a credit at the end of each day depending on if you are in profit or not.

But with binary options the risks are fixed.  You bet a certain amount and that is your maximum loss.  If you win the bet, then you receive your stake back plus between 30% and 99% profit.  The return depends on what type of trade you place and what broker you use.  By using a reputable binary options broker you should be able to see clearly what the potential returns are.

Binary options are derived but not actually that similar to traditional options.  Traditional options are mainly used to money managers and investors to protect their portfolios and to hedge risk.  in the US they are quite a common form of speculation on stocks it is possible to make huge returns from a very small trade, but these are few and far between.

Secondly, are binary options a scam?

This is a question with two answers.

Firstly, binary options are not a scam. They are a type of trading. Binary options are simply a financial product that allow people to place fixed risk bets on financial markets.

The second part of the question “are binary options a scam” is really a case of regulation. You can read the FCA’s position on binary options regulation here. If you use a properly regulated binary options broker based in the UK then you are unlikely to be scammed.  We have comparison table of trusted UK regulated binary options brokers.

However, where clients can get scammed with binary options is by trading through a broker that is unregulated and uses high pressure sales tactics to rip clients off.  There are many brokers who use the EU regulation passport, base themselves offshore in Cyprus or Belize, and then use highly trained sales staff to encourage customers to put on trades under the promise of big profits.  It’s basically the latest product for “Wolf of Wall Street” wannabes to generate high commissions at the cost of client losses.  You only need to watch “Boiler Room” to understand how the process works.

All these scams are based on real financial products.  The Wolf of Wall Street and Boiler Room are based on penny stocks in the US.  Penny stocks enable private companies to list on the stock exchange to raise money to grow their businesses by offering shares to the public.  But it is the lack of proper regulation that enables clients to be suckered.

So in summary…

If you want to trade binary options go with a decent broker and accept that you are not going to be a millionaire over night. In fact you’ll probably loose some, if not all of your money.  Most short term speculators do. Even the best fund managers find it hard to make 20% so why on earth would an amateur trader be able to do any better?

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