Is Binary Options Gambling?
A quick online search could lead you to the conclusion that “yes, trading binary options is gambling”. However, if you spend time understanding how binary options work, including their merits and drawbacks, you will find that the answer is not that clear-cut.
In this article, we examine whether binary options is gambling by analyzing what binaries are, then comparing the all-or-nothing style of investing to betting, and finally by discussing the rules and regulations surrounding binary options. We also talk about the role strategy plays in becoming a successful trader, and share tips for safely engaging in binary options to avoid gambling behavior.
Binary Options Brokers
Binary Options 101
To understand the binary options gambling debate, you first need to know binaries work…
Binary options are a type of derivative that involves betting on the price movement of an asset in the often near future for a fixed amount. As the word ‘binary’ suggests, there are typically two outcomes – the trader is correct and wins a fixed payout, or the trader is wrong and they lose their initial bet.
There are several key components in a binary options contract:
- The underlying market: Binary options are available on almost any asset or market, including stock prices (Meta/Facebook, Pfizer etc), indices (S&P 500, NASDAQ 100 etc), commodities (gold, silver, crude oil etc), foreign exchange (EUR/USD, GBP/USD, etc), and cryptocurrency (Bitcoin, Ethereum etc).
- The strike price: The strike price is the supposed market price of a security at which it is bought or sold. By taking into account the strike price, a trader may choose either a call option, expecting the value of the underlying asset to be above the strike price when the contract expires, or a put option, expecting the value of the underlying asset to be below the strike price when the contract expires.
- The expiration date and time: Binary options gambling contracts have different durations, including short-term expiries that range from 30 seconds to 300 seconds, medium-term expiries that range from 5 minutes to a couple of hours, and long-term expiries that range from a few days to weeks and months.
- Payout: This is the amount a binary options trader stands to make from a correct prediction. Often, brokers will offer payouts of between 70% and 95% on popular assets. So if you staked $1000 on a prediction with a 90% payout, and you were correct, you would receive $1,900 ($1000 bet + $900 profit).
A simple example can make it easier to understand how binary options gambling vs trading works. Suppose an underlying stock is priced at $82 at 9:00 am, you expect it to rise to $85 at 9:15 am, and have $100 as initial capital to bet. The available contract offers you an 85% return with an expiration time of 9:15 am and based on your expectation, you naturally choose a call option.
In the first scenario, the price of the stock reaches $86 at the end of the duration, which means you win $185, and make a net profit of $85.
In the second scenario, the stock price lowers to $78 by 9:15 am, meaning that you lose the $100 you bet on the option.
This standard type of binary option is called a High/Low trade; however there are other contracts you might consider as a day trader. In the In/Out binary option, traders make their predictions over expected price ranges. Traders choose in if they expect the price to stay in a predetermined range at the time the contract expires, or they choose out if they believe otherwise. In the Touch/No Touch option, traders predict whether the price of an option will touch or won’t touch a certain value at any point in time before the expiry.
If you are trying to understand whether trading in binary options is profitable in the long run, you should also take into account:
- The win or success rate, which is the number of times on average your trades are successful out of a total of 100 trades for a given payout, and;
- The breakeven ratio, which is the percentage of the correct predictions needed in the long run so that you will neither earn nor lose any money.
For instance, if the payout offered by the broker is 85% as in the example above, you need to have a correct prediction rate of 54.1% to break even. In binary options, the win rate needed to break even decreases as the payouts increase; however in any case, the odds in binary options favor brokers, as even with higher payouts of 95%, the success rate needed for breaking even is over 50 percent. As a result, many commentators believe binary options is gambling. But is it that simple?
Binary Options Trading Vs Gambling
Both in binary options and gambling, only two outcomes are possible: you either win or lose. Many people see binary options as a pure-chance game because of that similarity. Moreover, binary options look very simple at first glance, which makes people believe that the skills you need to trade binaries are no different than the skills you need to roll a dice, flip a coin or use a slot machine.
However, when one reflects on arguments used to equate binary options trading and gambling, several differences stand out:
Random & Not Random Outcomes
Many say that binary options is gambling because the odds are against the trader/player. If so, why should one spend time in binary options, when he can play online blackjack which could offer an even higher payout?
Yet, this argument ignores an important difference: In blackjack, the outcome of the game is independent of any external factor, while in binary trading the outcome is largely dependent on real-time events. Hence in casino games, the odds are truly against the gambler, whereas in binary options, improving the odds rely on traders’ ability to follow and make meaning of the current events affecting stock, forex or crypto markets, for example.
Gut Feelings Vs Personality Traits & Learned Skills
Some believe that in both gambling and binary options, the players/traders base their decisions on their gut feelings and deny the contribution knowledge, skills, research, analysis, and strategies make to positive outcomes.
But importantly, you should view binary options as the art of making repeated short-term investments based on an optimal buy/sell strategy or system which balances expected risks and returns. This reduces the risk of binary options gambling.
To be a successful binary options trader, you also have to hone personality traits like being focused and disciplined as well as avoiding emotions in decision-making. You should be able to excel in methods used for mitigating risks, be good with numbers, be ready to conduct detailed research to identify opportunities, be able to find the investing styles that suit your investing traits, be a good interpreter of news, and be an active learner.
If you can tick these boxes then binary options is not gambling, but carefully considered and researched trading.
The risky nature of binaries is another reason why many people think binary options is gambling. However, if someone starts to categorize every activity that is associated with risk as gambling, all investments, especially all types of retail investing in financial markets, could arguably fall under this category.
Some may say that the duration of trades is a factor that determines the closeness to gambling. People argue that, in addition to binary options, forex or derivatives like spread betting are closer to the edge of gambling than investing due to the often short duration of trades. They say that in binary options contracts, short expiries like the popular 60 seconds make it impossible to make a decision based on calculated risk.
Yet, binary options is available with different expiries, meaning that there is still space for profit in binary options with longer contract lengths. Secondly, different strategies are available for binary options contracts with various expiries, which allow a trader to take a calculated course of action. This can help reduce the risk of binary options gambling.
A short list of a couple of popular strategies might give you an idea about how it is possible to lower the risk of losses and pump up winnings:
- Rainbow Strategy: A rainbow strategy is based on multiple moving averages and the name rainbow comes from colors associated with each moving average. In binary options, traders usually use three moving averages since moving averages with shorter periods react to price changes more quickly.
- Candlestick Strategy: Candlestick charts help traders understand the open, close, high, and low prices of an asset over a given time. The trader, of course, has to spend some time to understand how to observe the patterns, and how to improve prediction skills by combining the information gathered from the graph with one’s own knowledge and experience.
Rules, Regulations & Brokers
An important part of the binary options gambling debate is also the regulator’s view point.
The history of any financial instrument more or less follows the same trend. Nearly all new financial tools, in the beginning, operate in an environment of the ‘wild west’, where effective regulations are not in place, the chances of coming across scam brokers are high, and many people flock into the market after learning that making large amounts of money in a short time is possible. But over time, the market for a specific instrument becomes better regulated, dubious brokers are identified and eliminated, and traders become more sophisticated.
Binary options were first introduced publicly as a tradable asset on the Chicago Board of Exchange (CBOE) in 2008. The Cyprus Securities & Exchange Commission (CySEC) for the first time classified binary options as tradable assets in 2012 and, as the derivative became more and more popular, many countries and institutions introduced their own sets of rules.
Today, in many countries binary options trading is legal and not considered gambling or betting. In the United States, for example, binary options investing is possible under quite strict rules overseen by the USA Commodity Futures Trading Commission (CFTC) and the USA Securities and Exchange Commission (SEC). Those bodies are responsible for both granting and suspending licenses for financial service providers.
In Europe, the CySEC, which is part of the European Markets in Financial Instruments Directive, recognized the binary options market in 2012 and detailed the rules for obtaining licenses to open binary options platforms. Following Cyprus, Malta also took steps to regulate the market to protect traders and investors. The CySEC in time improved the initial rules to avoid scam companies that operated in the market while aiming to deter binary options gambling behavior.
The European Securities and Markets Authority (ESMA) then put a temporary ban on binary options contracts in 2018, which it later extended several times to prevent scams and losses. The ban made it difficult for retail brokers and traders, but it is possible to avoid the ban and trade freely by working with an unregulated, offshore binary options broker.
Following ESMA, in the United Kingdom, the Financial Conduct Authority (FCA) banned firms from selling binary options in 2019 over concerns regarding fraudulent activity in the market. However, as in Europe, British investors also have the chance to trade binary options by using offshore brokers and platforms.
These regulations, rules and bans prove that traders should be cautious in choosing brokers for binary options. Many websites provide lists of binary options brokers blacklisted due to scam schemes. There are also some common characteristics of scammers, like creating several websites and profiles, using exaggerated advertising to grab attention, and disappearing after a short period of operation.
To find the best binary options brokers while avoiding gambling sites, traders should check reviews and use a set of criteria to judge providers, such as payouts, contract lengths, minimum deposits, bonuses, the convenience of withdrawal of funds, and the quality of the customer support team.
The Verdict; Is Binary Options Gambling?
If it is impossible to develop a strategy for a financial instrument with a positive expectancy or if it is possible to have a positive expectancy without using any strategy, then you are probably on the verge of gambling. However, this does not apply to binary options, since it is possible to design strategies that ensure more wins than losses and thus help traders make profits. In fact, it is the trader who decides whether to use binary options as a type of gambling or as a type of retail investment based on calculated risks.
Under the current regulatory environment, binary options traders should also keep in mind that although the financial instrument itself is not a scam, it is important to find reliable brokers.
Is Binary Options Gambling Or Trading?
This ultimately depends on how the trader approaches binary options. Making wild guesses with no plan or strategy is effectively gambling. However, traders that take a disciplined approach, research a particular market and devise an effective strategy consider binaries as a legitimate form of online investing.
Can I Make Money With Binary Options Gambling?
Yes, you can be among the traders who make profits from binary options, as long as you do not treat it as a pure chance game and work on finding a suitable strategy and learn to mitigate the risks. The top trades also have a sensible money management plan to avoid binary options gambling.
Are Binary Options Legit Or Gambling?
Binary options are a legitimate financial instrument but you should beware of scammers that generally target new beginners. With this in mind, make sure you trade with trusted and recommended binary options brokers. Also to avoid approaching binary options like gambling, make sure you develop, test and refine a winning strategy.