Binary options trading is the newest trending buzzword on Wall Street. It is one of the most simple financial asset classes and works in a way that is similar to traditional derivatives trading. But unlike traditional futures and options trading, there are only two settlement options, a fixed amount or nothing at all. This is why they are called binary options.
How Binary Options Trading Works
To understand how binary trading works, let us assume that you are trading in crude oil binary options. If you believe that the price of one barrel will be USD 91.05 or lower at 2:30 pm on that day, you sell the option. Conversely, if you believe it will be higher you buy the option. The price of a binary option can only be between USD 0 and 100.
Let us assume that you buy the option when the bid price is at USD 55. Thus, you believe that the price of one barrel will be higher than USD 91.05 at 2:30 pm. If you are right, the price of your option becomes 100 and you stand to make USD 45 on that trade. But if you are wrong, the price of the option becomes 0 and you lose your bid amount.
This rather simple mechanism of binary trading has made it a hit among new investors and novice traders. However, a closer look at the mechanism of trading will give you the feeling that it is rather similar to high-stakes gambling. And that is because it is. The chances of you making any substantial gains from this kind of trading is rather low. And to top it off, the internet is now rife with fraudulent companies trying to cash in on the attractiveness of this kind of trading.
Close to USD 10 billion are lost to binary trading every day. Fortunately, governments around the world have woken up to this issue. If you have been a victim of this type of crime, you can complain to the trading regulatory authority of your country. There are organizations and consultants that specialize in binary trading scams recovery as well. But as the old adage goes, it’s always better to be safe than sorry and avoid falling into a binary trading scam in the first place.
The 3 Major Kinds of Binary Trading Scams
The largest section of binary options scam victims are individuals who have been unemployed or work from home. I.e. people who have been affected by the pandemic and are soft targets. The US Securities and Exchanges Commission categorizes these scams into:
Client Credit Denial
In this kind of scam, customers deposit money into their binary trading accounts. The companies further encourage customers to deposit additional funds over the telephone. However, all customer payout requests are canceled or denied. Furthermore, phone calls and emails to the company go unanswered as well. There are a large number of hidden fees, commissions, and taxes. On paper, you might find that your investment amount is growing. However, when you go to withdraw the profits you will be cited various charges which will effectively reduce your earnings to almost zero.
Compromised Personal Data
Many of these companies do not intend to do legitimate trading in the first place. They specialize in stealing sensitive information from customers. At the pretense of easy storage of information, they collect identity, credit card, and bank account information. These are later sold off to other fraudsters. This is especially true if the company in question is located in an offshore location.
Software Manipulation
Some fraudulent companies manipulate the expiry time of the option in order to turn winning trades into losses. Binary options are time-bound to the minute. A slight delay in closing the trade can result in the price of an option going above or below your set bid or ask price. Companies deliberately delay or prepone expiry to suit themselves.
For instance, in the example above you had predicted that the price of crude oil will be above USD 91.05 per barrel at 2:30 pm. If the price is above USD 91.05 per barrel at 2:30 pm the trading platform could delay the close of the option by a few seconds. If the price falls to USD 91.03 per barrel, you lose the trade and your investment.
Protecting yourself
The Financial Conduct Authority has some simple ways by which you can protect yourself. When selecting a binary options trading company to use always check the FS Register or IAPD to see whether the firm is registered. Other databases include BASIC Search and the FCA Warning List.
Fraudulent companies mainly use online advertising and social media to advertise. This is a major red flag when you see any kind of advertisement online promising high returns. Just like gambling, the odds are always in favor of the house and no legitimate company will promise high returns.
Remember that binary trading requires sound technical trading expertise. It also requires in-depth knowledge of the commodity market that you will trade with. And if you are doing binary trading for the thrill of betting, there are more secure ways of engaging in the activity. Just head over to an authorized derby or a casino.
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