Binary options

All or nothing options

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 don't, you get nothing. While binary options promise high returns quickly, the reality is you will lose your entire investment most of the time.

Here we explain what binary options are and the risks you need to know about before you start trading in them.

What are binary options?

Binary options, also known as 'all-or-nothing options', 'fixed return options' or 'digital options', allow you to make bets on financial products (including shares and foreign exchange), 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, from a few minutes or hours, to a few months in the future.

Trading binary options appears to be simple, but picking the short-term movements of an underlying asset is extremely difficult, even for professionals. They are high-risk, speculative investments which really just gamble on the movement of an asset price.

Types of binary options

There are two main types of binary options:

  • Once touch binaries - The underlying market or asset price will or won't reach, or touch, a specific level, on or before, the contract expires.
  • Digital binaries - The underlying market will or won't  finish higher or lower than a specific level at expiry.

There are unlimited variations of these two types of binaries, including combinations with plain vanilla options. For example, the binary might be for whether the price of XYZ share will remain between $10 and $20 for 3 months, or whether it won't stay in that range for 3 months.

Before investing, it is important you understand how the type of binary option you are considering works and how it is priced. You'll also need to be comfortable with the fact that you risk losing all of the money you invest. 

Binary options trading platforms

Most binary option providers operate through online platforms and mobile apps. Not all platforms and apps that offer binary options are licensed, which is against the law. Many people have lost a lot of money through unlicensed binary options providers.

Before you use an online platform or app to invest in binary options, make sure the provider has an Australian financial services (AFS) licence or is authorised by an AFS licensee, by searching ASIC Connect's Professional registers.

Removing unlicensed apps from the Apple and Google app stores

ASIC has been working closely with both Google and Apple to remove unlicensed binary options apps from their app stores. See ASIC's media release for more information. Apple has now banned binary options trading apps from its app store. 

ASIC also welcomes Google's move to ban advertising of binary options. This will help make sure you are less likely to be exposed to risky products and unlicensed operators.

Case study: Richard invests in binary options

Case Study RichardRichard saw an online video advertising binary options that claimed he could make an 80% profit in just a few minutes.

Richard visited the company's website and saw that they offered binary options on the shares of some large, well-known companies. Because Richard had a share portfolio and actively followed the share market, he thought he'd give it a go.

Richard paid $400 for a binary option contract that expired in an hour. He placed a 'call' option with a payoff of 70%, or $280, if the share price was trading above the current price of $1.50 at the expiry time.  An hour later the share price was trading at $1.48. Richard did not pick the price movement correctly and lost his $400.

He decided binary options were too risky for him and that he'd be better off focusing on his share portfolio.

Risks of binary options

Binary options promise quick, high returns - sometimes as much as 50% to 80% of your initial investment - if you pick the correct price movement. However, the reality is, if the price does not move in the direction you chose, you'll lose 100% of your investment. 

A 2017 ASIC review found that up to 80% of binary option investors did not make a profit.

Binary options-piechart

You need to understand the implied probability (the true odds of an event occurring) from the binary price. The midpoint between the buy/sell prices is a good indicator of the expected probability of the binary settling at 100. For example, if a binary buy price is $10 and sell price is $14, the midpoint of these amounts is $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 may also be a risk that the binary options provider won't be able to fulfil its obligations to you if something goes wrong (also called 'counterparty risk'). For example, if the provider became insolvent, you may be ranked as an unsecured creditor and have difficulty getting your money back. 

Binary options are a high-risk, unpredictable investment that is really just a gamble. Before you invest in them, you may consider getting professional financial advice to make sure they are suitable for you.

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Last updated: 23 Sep 2019