Can you really make money trading Binary Options?

There is a lot of debate online whether one can actually make money in the long run from trading the new breed of Binary Options that are being advertised aggressively advertised over the web. Today I’m going to look at some of the arguments against Binary Options.  

The Pricing of Binary Options 
A Binary Options provider acts a direct counter party to any open binary positions you make so they have an interest in you being a loser in the long run. This makes the pricing of the options incredibly important otherwise a long streak of successful trades could lead to the provider going out of business. To avoid this Options are priced using complicated formulas ensuring that over the long run the binary option provider is almost guaranteed to make a profit. In reality the odds of the option coming into the money are much longer than what is reflected by the return on the site. This means one would have to be right a vast majority of the time.  

Binary Options are priced differently to how they are traded in the Financial Markets 
Binary Options are generally offered online in a format that is very different to the format that they are traded on the general financial markets. This makes it much more difficult for the customer to use pricing methods such as the Black Scholes model for Binary Options, which I featured in excel format on this website. Real life options traders make the majority of their money from trading options that are deemed to be over or under priced. By offering Binary Options in a format in which the customer can not use such mathematical models to work out whether the options are likely to profitable or not, it prevents the trader from taking advantage from any mispricing of options made by the provider. Plus the use of such models would likely alert customers to the fact they are getting a rough deal.  

Delayed Data 
Many Binary Options sites have a warning stated that some of the data and price feeds may be marginally delayed. When this is the case the Binary Options website is able to price their options using real time data, while their customers only have access to the slightly delayed data. This asymmetry gives the Binary Options provider a further advantage over their customer allowing them to make abnormal profits. This is known as front-running in the trading world and is sadly a practice undertaken by a large number of derivative providers. Many Binary Options contracts are for extremely short periods of time making this a very effective technique. 

Largely Unregulated Industry 
The Binary Options Industry is largely unregulated at the time of writing. A number of companies are regulated by various gaming commissions giving the consumer at least some protection. However a number of firms remain totally unregulated increasing the opportunities for foul play or worse. 

Whenever you find yourself in a position where you are undertaking a financial transaction against a counter party you have to concern yourself with the question what is it in it for them. The answer is that they are probably odds on favorites to come out as a significant winner in the long run. 


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