Binary Options are Gambling Not Investment!

Binary Options are Gambling Not Investment!


If it’s heads you double your investment,
if it’s tails you lose everything. That’s
the essence of a binary option. Many unscrupulous
people are packaging these as investments.
But it’s not an investment, it’s gambling!
So if you want to understand what a binary
option is or what options are in general then
watch this video.
Why do we think binary options are gambling
not investment? Okay, if you’ve been trading
options for years it would make sense to play
around with binary options, but for someone
who’s new to investment it really is like
juggling chainsaws. And thanks to a regulatory
loophole companies that are selling binary
options to unsophisticated investors are able
to operate within the EU and don’t need a
license from the FCA or from the Gambling
Commission.
To understand why this is gambling and not
investment let’s step back and see what an
option actually is. As its name suggests it’s
an option, but not an obligation, to buy something
or sell something (that would be a call option
or a put option) for a fixed amount, that
would be the notional amount at a fixed price,
which is the strike at a fixed time in the
future, that’s the expiry. Although that seems
like a fairly simple setup the consequences
can get a little bit hairy.
But you don’t need all of that maths to understand
the essence of an option. This is really all
you need to know. The case you’re probably
familiar with is the one on the left where
you just buy a stock. You buy it because you
think the price is going to go up. And your
profit goes up one for one and down one for
one as the share price moves up and down.
The upside of an equity is unlimited and the
downside is that you could lose your whole
investment. But the key thing here is the
payoff is linear. If the share price goes
up 1% the value of your investment goes up
1%. If the share price goes down 1% you’ll
lose 1% on your investment.
But what if you don’t want the downside? What
if you just want to buy the upside of the
stock at some point in the future? In that
case you can buy a call option. So let’s say
the stock is trading at 100 pounds today,
and in one month’s time you think it’s going
to go up. You can buy a call option to buy
the stock at 100 pounds. If in one month’s
time the stock price is below 100 pounds you
don’t exercise your call option. Remember
it’s a right to buy not an obligation to buy
at a hundred pounds. So if the price falls
to 99 pounds you just won’t exercise the call
option and you’ll lose what you paid for the
call option upfront. But if the share price
is 110 well, you would exercise the call option.
You can buy it at 100 and you can sell it
instantly for 110. And that way you make a
healthy profit. This is really neat because
all of your losses are paid upfront. The most
you can lose is the price of the option, and
usually that’s a tiny fraction of buying the
stock. That’s the beauty of an asymmetric
payoff.
But the aspect of it which is tricky to understand,
particularly for people who are new to investment,
is leverage. I’ve shown here two scenarios,
one in which the share price moves up by 30%
and one in which it moves down. If we buy
the share we’d either make a 30% gain or a
30% loss. We’d pay a hundred pounds upfront
and we’d either pocket 130 pounds or 70 pounds
after that one year has passed. On the bottom
you can see the cash flows, but this time
it’s if we buy a call option. The price we
pay upfront is just a fraction of the hundred
pounds, here I’ve shown it as 20 pounds. Now
when the share price moves up by 30% we have
an option to buy at 100. Do we do that? Well
yes! We buy for 100 we sell in the market
for 130 and we pocket that 30 pounds. But
here’s the beauty. We only pay 20 pounds upfront
so instead of a 30% return our return is boosted
to 50%. So that’s the good side of leverage.
Here’s the ugly side. If the price had moved
down by 30% well we certainly wouldn’t exercise
our option in that case. Why pay 100 pounds
for the stock if we can buy it in the market
for 70? So the 20 pounds we pay for the option
would expire worthless. Our return in this
case would have been a loss of 100%. And the
probability of that loss is fairly high, it
would have been about 50%. If you compare
the returns in those two scenarios for the
share we’d have gained 30% for the option
we’d have gained 50% and in the down scenario
the share would have lost us 30% and the option
would have lost us 100%. And that’s what leverage
does. It amplifies our gains and our losses.
If you’re investing your life savings leverage
should be used with a great deal of caution.
So what’s a digital call option? Instead of
the hockey-stick payoff that we saw before
the payoff is now a step function which means
that if the stock price moves above 100 we
get the full payoff but no more. Our upside
is no longer unlimited. It’s now limited by
the binary call option. The downside is just
the same. If the stock price is below 100
at expiry we lose everything. This is much
more akin to the coin toss example which I
used in the introduction. Usually these binary
options are very short-term and they carry
leverage which, to me, is pretty close to
the definition of gambling.
So is the regulator asleep? Fortunately not!
But as they say on their website they don’t
regulate binary options. If a firm is located
in the UK and they deal in binary options
they need to be regulated by the Gambling
Commission. But there are many worrying reports
about consumers being scammed by fraudsters
who claim to be selling binary options. So
if you are going to trade these, and I wouldn’t
unless you understand options, if it’s based
in the UK check that they’re regulated by
the Gambling Commission. If it’s in an EEA
member state check whether they’re authorised
to deal in binary options or alternatively
that they’re authorised to deal these options
in their home country. Don’t go for fly-by-night
companies which are not regulated. And always
follow the very simple guideline: don’t invest
in things you don’t understand. If you’ve
lost money with binary options please contact
us. Do you agree with us that it’s gambling
not investing? You can tweet us @PensionCraft
or contact us on Facebook. To see more of
our videos look at our website.

6 thoughts on “Binary Options are Gambling Not Investment!”

  1. Binary is not magic, you’re not going to be a millionaire over night, but it's a good market to raise your finances at a steady growth. You need a proper understanding or a super broker to trade for you. My wealth of experience in binary trading has spoken volume for me. Please my email and whatsapp is open for serious minded traders who are ready to make consistent profit. You can contact me via email: @ [email protected] or whatsapp @ +1 346 954-0789 for more information

  2. What would you say if someone replied that Binary options are not gambling simply because there are regularities one can exploit in order to make money. These are called chart patterns and are used all around the globe, not only by binary options traders and forex traders but also by investment banks' employees who run the trading desks?

  3. no wonder your video did'nt earn any decent views, excuse me sir but your point doesn't make sense, i trade both forex and BO and i can easily say they're both far far away from any gambling activities if you're doing them right! you gumble, you LOSE!

  4. This is a great video. I am using it in my own website about this topic here: https://binbitforex.club/binary-options-gamble/

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