Binary options promise quick, high returns. But the reality is you will lose your entire investment most of the time.
Binary options are financial products that bet on the outcome of an event. If you pick correctly, you get a fixed cash payout. If you get it wrong you loose your entire investment.
How binary options work
Binary options are also known as 'all-or-nothing options', 'fixed return options' or 'digital options'. They allow you to make bets on share prices, foreign exchange movements, markets or economic events. For example, you could bet on whether the share price of a company will be trading above its current price in one hour.
Contract times for binary options are usually very short. They range from a few minutes or hours, to a few months in the future.
Trading binary options may seem simple. But picking the short-term movements of an underlying asset is extremely difficult, even for professionals. They are high-risk and speculative. When you trade binary options, you're gambling on the movement of an asset price.
Types of binary options
Before investing, it's important you understand how the type of binary option works and how it's priced. You'll need to be comfortable with the fact that you risk losing all of the money you invest.
There are two main types of binary options:
- Once touch binaries - the underlying market or asset price will or won't reach a specific level by the time the contract expires.
- Digital binaries - the underlying market will or won't finish higher or lower than a specific level at expiry.
There are lots of variations of these two types of binaries, including combinations with plain vanilla options. For example, the binary option might pay out if:
- a share price remains between $10 and $20 for 3 months, or
- it won't stay in that range for 3 months
Binary options trading platforms and apps
Many people have lost a lot of money through unlicensed binary options providers. Before you use a binary options online platform or app, search ASIC Connect's Professional registers to make sure:
- the provider has an Australian financial services (AFS) licence, or
- is authorised by an AFS licensee
Risks of binary options
Binary options promise quick, high returns if you pick the correct price movement. The reality is, if the price doesn't move in the direction you chose, you'll lose 100% of your investment.
An ASIC review of investors use of binary options found that up to 80% of binary option investors did not make a profit.
Determine the true odds of an event occurring from the binary price (the 'implied probability'). The midpoint between the buy/sell prices is a good indicator of the expected probability of the binary settling at 100. For example, a binary buy price of $10 and sell price of $14 has a midpoint of $12. This indicates that the market expects there is only about a 12% probability of the binary settling at 100. In other words, there's only a 12% chance of you winning.
There's a risk that the binary options provider won't pay you if something goes wrong (also called 'counterparty risk'). For example, if the provider becomes insolvent, you may have difficulty getting your money back.