Not Quite Investments: Binary Options Are Purely A Gamble

The Ohio Division of Securities recently initiated an administrative action against an online binary options platform operating from the United Kingdom. The Division alleges that Vault Options lured at least one Ohio investor into investing $50,000 based on false and fraudulent statements, including touting the security of the investment and inflated returns up to 500 percent.

Binary, Digital, and All or Nothing Options

In light of this ODS action, it strikes us as a good time to address the growing popularity of binary options, also sometimes known as “digital options,” “all-or- nothing options” or “fixed-return options.”

There are a lot of ways to lose money on the Internet. You can bet on video slot machines, wager on Internet craps or roulette, or play online poker. But that’s gambling, right?  It’s kind of tawdry. Even if you’re a bit of a risk taker, you might feel better “investing” your money in the stock market. That’s where binary options come in. They somehow have an aura of respectability because their purveyors represent them to be a form of investing, rather than gambling. For example, consider these remarks culled from several digital options websites:

  • “Binary Options are the simplest way to trade on the market.”
  • “Binary option trading enables both beginner and experienced investors to make substantial returns from stock market trading.”
  • “Binary options are limited risk contracts based on a simple yes/no market proposition offering traders innovative ways to trade the most active markets with relatively low collateral.”

Despite this careful branding of binary options as investments, their purchase is purely a game of chance. Let’s translate the last blurb above. The “simple yes/no proposition” is a bet; the “relatively low collateral” is the sum you wager and risk losing (a sum which may not seem “relatively low” to you); and there isn’t any “stock market trading” going on because you’re not buying, selling, or otherwise controlling any assets.

What is Binary Options Trading

When you engage in a binary option transaction, you’re betting a sum of money that something will or won’t happen in the near future, often as soon as five minutes in the future. For example, the yes/no proposition connected to a binary option might be something as simple as whether the stock price of ABC Corp. will be above $10.50 per share at 3:30 pm today. If you guess correctly, you win and get back what you bet plus a percentage of that amount as profit – usually in the neighborhood of 70%.  If you guess incorrectly you lose all or virtually all of what you bet.  The return paid to a buyer who guesses correctly is always set lower than the amount that will be lost if the buyer guesses incorrectly. Thus, the house has a clear statistical advantage.

The binary options market mostly operates through overseas trading platforms that likely will not be complying with U.S. or state regulatory requirements designed to protect investors. Moreover, the SEC and CFTC have received numerous complaints of fraud associated with websites that offer an opportunity to buy or trade binary options through Internet-based trading platforms. The complaints fall into at least three categories. The first category of alleged fraud involves the refusal of certain Internet-based binary options trading platforms to credit customer accounts or reimburse funds after accepting customer money. The second category involves complaints of identity theft. The third category of fraud alleges the manipulation of the binary options trading software to generate losing trades.

In short, binary options carry risks of loss that go beyond the purchase price. They’re not even really “investments,” and are largely unregulated by state or federal authorities. But if you still want to play these options, do so with the knowledge that they are games of chance and you may as well be feeding your money to a slot machine.