Binary options

Binary options promise quick, high returns. But the reality is you will lose your entire investment most of the time.

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 get it wrong you lose your entire investment.

An ASIC review found that around 80% of retail clients lost money trading binary options.

From 3 May 2021 binary options providers, trading platforms and apps are banned from selling binary options to retail clients. Binary options are also banned in many financial markets overseas.

How binary options work

Binary options are also known as ‘all-or-nothing options’, ‘fixed return options’ or ‘digital options’. They allow you to make bets on share prices,  foreign exchange  movements, 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. They range from a few minutes or hours, to a few months in the future.

Trading binary options may seem simple. But picking the short-term movements of an underlying asset is extremely difficult, even for professionals. They are high-risk and speculative. When you trade binary options, you’re gambling on the movement of an asset price.

Risks of binary options

Binary options promise quick, high returns if you pick the correct price movement. The reality is, if the price doesn’t move in the direction you chose, you’ll lose 100% of your investment.

An  ASIC review  found up to 80% of binary option investors lost money.

ASIC also found that binary options are likely to result in cumulative losses to retail clients over time because of the product’s characteristics:

• the ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client will lose their entire investment
• short contract duration (the average contract duration of binary options traded with one provider was less than six minutes)
• negative expected returns (that is, the present value of the expected payoff for a binary option contract is lower than the initial amount invested).

Wholesale clients lose consumer protections

Some firms may try to classify you as a ‘wholesale client’, rather than a ‘retail client’. They could ask you to sign up to a ‘pro-account’ and speak about the benefits to you. However, if you’re a wholesale client you:

• waive your right to access the binary option provider’s internal dispute resolution service
• will not have access to external dispute resolution through the  Australian Financial Complaints Authority (AFCA)
• may not receive a Product Disclosure Statement or Financial Services Guide or the binary option.

Scams involving binary options

There are scammers who use binary options to steal your money. Be very cautious if you receive a phone call or see an ad online or through social media offering binary options trading.

If you invest through an unlicensed overseas company and something goes wrong, you won’t be able to get help.

See our tips on  avoiding investment scams.

Source:

Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/investment-warnings/binary-options
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