Binary Options

Okay, I wouldn’t even post about these instruments except that the Quebec securities regulator decided they had become so popular as to warrant a warning to “investors”. I always passed by such ads assuming everyone would view it as gambling and prone to abuse. But alas, these types of ads show up everywhere including financial sites that ought to ban them.

How to get abused: Binary options are a true/false wager where something volatile goes up or down (e.g. stocks, foreign exchange) in a short period of time (within minutes). If you wager it will go up and it actually goes up, you get an 80% payout (let’s say). If it instead goes down, you lose 100%. The person(s) on the opposite side of the wager get 80% of your loss, much like you get 80% of their loss.

Besides the fact that some intermediary is pocketing 20% somewhere (high for equities on a stock market but not so high for brokers dealing in Pink Sheet stocks) the expected result (from my probability class) is worse than Blackjack, Roulette or pretty much any gambling you can find in a casino including slot machines! And with Pink Sheets you can at least pretend you bought part of a viable company.

If the payout for binary options were close to 50-50 (like Blackjack, Craps or Roulette) then it would be a reasonable gamble to “invest”. But since the 20% for binary options is larger than the 10% a casino pockets for Slot Machines, this is worse than gambling. It’s a whole category beneath gambling – it’s like locking yourself in a room with Tony Soprano and his goons while you can only leave after giving up 20% of everything.

Foreign Exchange is completely random in the short term and nearly impossible to get right in the long term. A large investor can move big stocks (or prevent them from dropping) for short periods of time – which means any bets you make can always go against you.

This is such a dirty business I have no idea how any one could call this an investment. It’s worse than a boiler room.