You probably just heard about binary options, how you can make up to 80% profit, even more, in 5 minutes or one minute by predicting the price of assets such as currencies or stocks and you wonder how it’s possible. In this article, we will explain in simple terms how binary options works.
How binary options works in a nutshell
In traditional trading, you buy or sell (short) an asset hoping that the price will go up or down and book a profit once your target is reached. In binary options, you buy a call (if you expect the price to go up) or a put (if you expect the price to go down) on a certain asset, let’s say the FX pair USDJPY, within a certain expiry (one minute, 5 min, 15 minutes, one hour, etc.). If the price closes above the entry point in case of a call, or under the entry point in case of a put, you win the trade. The outcome is binary : either you lose your stake, or you win the fixed amount indicated just before you took the trade.
Okay, but how does it work asset-wise?
In binary options you don’t really buy the underlying asset. You rather make a financial bet on the outcome. Digital options are therefore closer to financial derivatives than assets trading. Binary options are some kind of contract that you make with a broker specialized in such trading offer. Even if there are some exceptions, it is very rare when a binary option trader is connected to a market maker.
What does it mean if this is how binary option works?
Some people might say that binary options are closer to gambling than trading. The answer is not binary, we can reply yes and no:
- No because contrary to, let’s say, craps, skills and knowledge can help you to beat the randomness. If you are skilled you can have a binary options trading win rate of 60 or 70%, even more. With dices it is impossible to reach such success rate unless you are cheating.
- Yes because you “play” against the house. Contrary to what people think, when you lose a binary option trade you don’t fill the pockets of a big bank or a prominent Wall Street trading house. Your losses are a profit for your broker.
In short, it means that it is in the interest of your broker that you lose money. That’s why there are so many binary options scams. Whether it is an outright scam in which they will never let you get your money back, or a more subtle one in which they manipulate the price feeds, or exclude good traders to maximize their profits.
But do not worry, there is now a safe alternative to this flaw related to how binary options works: a broker-less digital options trading platform governed by blockchain smart contracts, Spectre. More details about Spectre ai here.