Traders who are willing to shoulder the risk of binary options have the potential for substantial profit on price fluctuations in the markets. However, this oft-misunderstood financial product has a contentious history. In this article, experts weigh in on whether or not binary options are a scam.
Legitimate Binary Products On The NADEX Exchange
“Many individuals, lured by the promise of easy money, are attracted to binary options? But are they a scam? That depends in part on how they are traded. There are legitimate binary products out there, offered on the NADEX exchange. This exchange is regulated by the US government. So, it is legal and offers traders protections against outright fraud. But, that does not mean that the route is easy. Trading costs can be high with binary options, so care is warranted if one chooses to trade binaries via the regulated route. Many other binary products, though, are not regulated, which leads to many unscrupulous players in the space. One such dealer from Israel was arrested upon landing in the US. Another example is an elderly gentleman, who asked for my help in getting his money from an unregulated binary dealer. He needed to pay for his wife’s chemotherapy. He never received his money. Unfortunately, that happens a lot with unregulated binary brokers. So, the answer to the scam question is beware of unregulated binary brokers. They could very well be a scam.”
Kevin J Davey, Founder, CEO and Head Trader, KJ Trading Systems
Properly Research Potential Investments And Brokers
“On their face, binary options are not fraudulent. Many binary options products are listed on exchanges and have regulatory oversight. But like Forex, many internet-based platforms have surged into the market, and with that surge, the opportunity for fraudulent promotional schemes, overstatement of returns, and the failure to pay out for the wins have increased.
Some off-exchange platforms have algorithms that manipulate the trading software to distort prices and payouts, and even delaying timing to ensure the trade loses. These small manipulations are not noticeable for traders and very difficult to prove both from a civil and regulatory standpoint.
Furthermore, some actors are using manipulative software to rig the system, so winning bids end up losing. This is new territory where some investors have made significant money. And where there are legitimate products, non-legitimate products follow. The main reason is the lack of clarity on the regulatory structure and the ability to make markets without oversight.
The easiest thing you can do is properly research potential investments and brokers, so you know a legitimate deal from an illegal one and ensure you are trading on a regulated U.S. exchange. This way, you can verify their registration and view job and disciplinary history through BrokerCheck (Finra registration database) or Background Affiliation Status Information Center (BASIC – NFA’s registration database). The Chicago Board Options Exchange (CBOE) lists reliable binary options and runs the CBOE Volatility Index Binaries to track options movement. CBOE is SEC-regulated, which adds layers of investor protection. Furthermore, performing web searches is still an easy way to determine if your potential broker has been accused of wrongdoing.”
Braden Perry, litigation, regulatory and government investigations attorney, Kennyhertz Perry, LLC
The Unfavorable Risk/Reward Ratios
“The word “scam” is a bit harsh. While there may be a lot of scams and shady practices in the binary options industry, the assets themselves aren’t necessarily scams. The reason binary options have a bad reputation is because of their unfavorable risk/reward ratios. The risk of a binary option is always 100% and the potential gain is usually under 100%, meaning the odds are worse than the casino. This concept is best illustrated by an example of the risk/reward of similar “investments:
Binary Options With 80% Payout. Potential Risk = 100%. Potential Reward = 80%
Roulette (Color Bet). Potential Risk = 100%. Potential Reward = 100%.
Stocks (Hypothetical Short-term trade with stop loss). Potential Risk = 1%. Potential Reward = 3%.
Essentially, binary options are bets with unfavorable odds. They are more similar to gambling than investing. Serious investors would be better off trading stock options (calls and puts) where risk management strategies and hedging can be applied. Trading options always carries a higher risk than trading stocks, but traders who seek the high risk, high reward” would likely do better with call and put options than they would with binary options.”
Dave R., DayTradeReview.com
Binary Options Are Akin To Gambling
“Binary options aren’t a scam, but neither is Blackjack. Both, however, are forms of gambling with the odds more in your favor with Blackjack particularly if you are a skillful player. Binary options are more akin to playing a slot machine. Unlike traditional options, a binary option pays a fixed sum at its expiration. The size of the difference between the settlement value and the option’s exercise price is irrelevant. You can easily lose your entire investment. Binary options are also ripe with potential problems such as failure to comply with registration requirements and quite importantly, fraudulent promotional advertising and disclosures. The platforms on which binary options are traded are generally Internet-based and in many instances not complying with SEC regulations. No one should ever invest in anything that they do not understand and the lure of binary options trading for people who don’t understand what they are investing in is great.
Is it legal? Sure if it is done properly? Is it more akin to gambling than an investment? You bet.
Warren Buffet once referred to derivatives as financial weapons of mass destruction. Binary options are derivatives taken to the nth degree.”
Steven J.J. Weisman, Lawyer, College Professor, Bentley University
Using Binary Options Does Constitute A Risk
“Binary options aren’t regulated by the SEC and have no backing or guarantees by the government or financial institutions. They aren’t necessarily a scam and some sites may / may not be legitimate and payout, however, using them does constitute a risk and there is no guarantee they will pay their winnings.”
Stacy Caprio, Fiscalnerd.com
The Industry Is Rife With Scammers
“In recent years binary options have developed a negative reputation and have become synonymous with online investing scams. Whilst this is not completely true it is not very difficult to understand how binary options have developed this reputation. Unfortunately, the industry is rife with scammers who operated a scam service whereby it was impossible to profit from. The reality is that binary options are not a scam and can indeed be a legitimate financial product but they are certainly considered a high-risk investment as the odds are stacked against you. Only a very small percentage of traders will succeed in trading binary options. Make sure you avoid all scam services which promote trading systems and signals – the old adage certainly applies here If it sounds too good to be true, it probably is.”
Patricia Russell, CFP, FinanceMarvel
There has been much debate sounding the risks and rewards of binary options. As a financial instrument, they have unfortunately developed a reputation as an investment scam online. Always do your due diligence before investing in binary options, or any investment opportunity. Likewise, always factor in expert advice when making investing decisions.