You’ve probably seen an ad asking you to try “binary options” or “binary trading.” These financial instruments are typically presented as exciting investment opportunities with the potential for fast and easy profits.
However, binary options are risky and more likely to leave you broke. So, what are binary options, and why should you avoid them?
What Are Binary Options?
Binary options (also dubbed all-or-nothing or fixed-return options) allow you to bet on the price movement of an asset within a predetermined time. Instead of buying a particular asset (stock, currency, etc.), traders place bets on how it will perform over a specified period—seconds, hours, days, or even months.
The trader may buy a call option (if they think the stock’s value will increase) or a put option (if they think it’ll decrease). They might also determine a strike price, which is the level the price must reach or surpass.
At the expiry date of a binary option, the asset’s price must be on the correct side of the strike price for you to earn a profit. You’ll either receive your initial stake and a predetermined percentage (most platforms offer 70 percent) of the original bet or lose your entire investment. Some platforms may return a small percentage of your initial stake (10-20 percent), but usually, a wrong guess leads to losing your entire investment.
For instance, you may purchase a binary option that requires you to speculate on whether the share price of XYZ will be above or below $50 on July 29, 2025, at noon. Let’s assume you think XYZ will be trading above $50 and stake $500.
If you’re correct, you’ll receive your $500 and $350, supposing the predetermined payout is 70 percent. However, if you’re wrong, you’ll most likely lose all of your $500.
How Binary Options Are Marketed
Binary options are typically marketed as a simple yes/no way for you to rake in huge profits. They are often positioned as a way to make money from home, achieve financial freedom, or earn income without doing anything.
You may discover binary options platforms or brokers while scrolling through social media or visiting a website via pop-up ads. Here are a few common tactics these platforms employ:
Binary options providers frequently claim that binary options are based on sound financial analysis and mathematical models and offer high returns with low or no risk. However, binary options aren’t based on reliable or transparent methodology or data. They are essentially bets on random and unpredictable events without connection to the real economy or financial markets.
Most of these adverts are almost so convincing that binary options are legit.
Why You Should Avoid Binary Options
Despite its promise that an opulent lifestyle is within reach, you should seriously avoid binary options. Here are five reasons why.
1. Lack of Regulation
Binary options aren’t a recognized financial instrument in most countries, so they aren’t regulated by any reputable authority or agency. As a result, there’s not much protection for traders who deal with binary options brokers or platforms.
Many of these brokers typically operate from offshore locations with lax or nonexistent regulations. They can easily scam traders by rigging the prices, changing the terms, refusing to pay out winnings, or disappearing with their money.
In 2013, theSEC announcedthe risks of trading binary options, emphasizing that most binary options platforms and brokers are either fraudulent or functioning outside the protections the SEC provides.
In 2021,Melissa Hodgman of the SEC saidthat “investors should be on their guard whenever they see high-pressure sales tactics and too-good-to-be-true promises of returns or performance.”
Binary options trading is a risky venture. Seeing as you won’t have regulatory protection, it’s a business you’re best avoiding.
2. Limited Potential Profits
Because there are only two outcomes, you may think you have a 50 percent chance of succeeding. However, binary options are a lot more complicated than that.
Imagine that you place 500 bets, each worth $50. You’ll receive a 170 percent payout for each bet you win and a 10 percent payout for each one you lose. The 170 percent includes your initial stake and a 70 percent profit, while the 10 percent is the percentage of your initial stake that the platform offers you in the case of a loss.
If you win 250 bets, you’ll earn your initial stake of $12,500 plus a profit of $8,750. Meanwhile, you’ll only earn $1,250 on the 250 bets you lose, giving up $11,250 from your initial stake. Overall, you’ll recover $23,500 out of your $25,000 total stake and lose $1,500.
Remember that in this hypothetical situation, the platform offers you some of your initial stake when you lose; traders usually get nothing back. You’ll need to be right more than half the time to break even. However, this is very unlikely due to the randomness of the price movements.
Moreover, the broker sets each option’s price and payout, usually skewed against the trader’s interest. The broker also charges fees and commissions for each trade, reducing earnings. In other words, the house always wins.
3. You’re Exposed to High Losses
With binary options, one wrong move and your capital is gone for good. With every stake, your entire investment is on the line, so you’re always exposed to losses that exceed your investment.
Moreover, unlike traditional investment options available on thebest investment apps, you can’t control your risk and reward ratio. You can’t even close or adjust your stake after you’ve placed the bet. There are no strategies to hedge your risks. One huge, unexpected price swing, and all your money is gone.
As most binary options platforms and brokers are fraudulent, the likelihood that you’ll be paid is low even if the price swing is in your favor. So, either way, you’re likely to suffer great loss.
4. Basis on Obscure Assets
Most binary options platforms and brokers only allow you to place bets on the performance of obscure or exotic assets that are volatile or hard to value. These assets includecryptocurrencies, penny stocks, indices, weather events, and even political outcomes. They are typically unsuitable for trading.
Besides, these brokers and platforms can easily manipulate these assets to deceive you. For instance, they may provide falsified data, signals, or charts that paint the assets in a positive, stable light.
Again, when it’s time for you to be paid, they can manipulate the assets to their advantage. For instance, pump a crypto token if you chose a put option and dump it if you chose a call option (also called apump and dump scam).
5. Not Suitable for Wealth Creation or Long-Term Investment
If you intend to grow wealth or achieve serious financial goals, there are better ways than binary options. They don’t generate any value for you or the economy and don’t reflect the performance or fundamentals of the underlying asset or market. Moreover, you don’t receive ownership rights or dividends from binary options.
Binary options are mostly designed for short-term speculations—much like gambling.
Over a long period, the price movement of an asset becomes more predictable. But in a shorter period, the asset’s price will be unpredictable, with many small increases and decreases. You can’t make an educated, informed prediction on how the price of a stock, currency, or any other asset will move within 15 minutes or less.
But this is what you’ll have to do when trading binary options—guesswork.
If It Seems Too Good to Be True, It Probably Is
Binary options promise almost limitless wealth but have almost no chance of delivering. You’re much more likely to lose all your money than to become a millionaire through this medium.
There are much better financial instruments with which you’re able to make money. Stay away from binary options and save yourself a lot of trouble.
