While binary options—a form of financial betting that allows people to wager on short-term price movements—are heavily restricted in the U.S., they thrive in many other countries worldwide, often operating in regulatory gray areas that leave consumers vulnerable to fraud and steep losses. Since they are overseas, they need not and mostly don’t follow U.S. regulations.
The Financial Industry Regulatory Authority (FINRA) summed up widespread skepticism of these instruments by financial watchdogs worldwide, advising investors “to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.”
Key Takeaways
- Binary options have a precise expiration date, time, and strike price.
- When offered by brokers outside the U.S., binary options are often not on regulated exchanges. Instead, these brokers set their own terms, including payout ratios, strike prices, and expiration times.
- Non-U.S. binary options typically have fixed payouts and risk and are offered by individual brokers rather than on an exchange.
- While typical high-low binary options are the most common binary options, international brokers typically offer several other types of binaries as well.
How Binary Options Work
Binary options let traders profit from price fluctuations in global markets, but it’s essential to understand the risks and rewards of these controversial financial instruments. Binary options bear little resemblance to traditional options and feature different payouts, fees, and risks.
Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides wagers on prices related to indexes, commodities, and currencies.
These options have a clearly stated expiration date, time, and strike price. Suppose a trader wagers correctly on the market’s direction and price at expiration. In that case, they are paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.
Binary Options Outside the U.S.
Binary options outside the U.S. are an alternative for speculating or hedging. Brokers might offer no commissions, innumerable strike prices, and expiry dates. Negatives include non-ownership of the traded asset, no regulatory oversight, and a winning payout that is usually less than the loss on losing trades. If you’re trading within the U.S. on these offshore exchanges, these platforms could be out-and-out scams.
In March 2024, the CFTC received a final judgment with penalties in the hundreds of millions against Bluemoon Investments, an illegal, off-exchange binary options firm. The case background offers a good summary of what regulators often find when they lift up the hood on many offshore binary options platforms:
The defendants offered illegal, off-exchange binary options via an internet platform they operated and maintained. …The defendants not only made material misrepresentations to customers and potential customers concerning the level of risk of binary options, but also manipulated the results of some trades to force customer losses and generate profits for themselves.
Call vs. Put Option
The binary options trader buys a call when bullish on a stock, index, commodity, or currency pair, or a put on those instruments when bearish. The market must trade above the strike price at the expiration time for a call to make money. For a put to make money, the market must trade below the strike price at the expiration time.
When the trade is established, the broker announces the strike price, expiration date, payout, and risk. For most high-low binary options traded outside the U.S., the strike price is the price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.
Foreign vs. U.S. Binary Options
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Typically found on internet-based trading platforms, many of which are shady and unregulated
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Potentially more options and flexibility
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Brokers profit from the difference between what they pay out on winning trades and what they collect on losing trade
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Trade on The Cboe Options Exchange, Nadex or Cantor Exchange all of which are regulated in the U.S..
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Less choices available
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Investors are charged a commission on trades
Non-U.S. binary options typically have a fixed payout and risk and are offered by individual brokers rather than directly on an exchange. These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an “all-or-nothing” payout structure.
Foreign brokers are prohibited from soliciting U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC). This does not stop many platforms from doing exactly that.
The Cboe Options Exchange began listing binary options for U.S. residents in 2008. The SEC regulates the Cboe, which offers investors more protection than over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC.
These options can be traded at any time, with the rate fluctuating between one and 100, based on the present probability of the position finishing in or out of the money. The percentages offered for these options fluctuate, offering advantages for those using various risk-to-reward scenarios. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counterparties.
How to Trade Binary Options
If you live in the U.S., your best option would be to trade in one of the country’s regulated exchanges with a reputable options broker. Regulation offers protection and peace of mind in a market rife with fraud. Check if your broker facilitates these trades. If it doesn’t, go with a trusted brokerage that does. Other than reputation and reviews, pay attention to fees and services offered.
Trading offshore is riskier. Many of the world’s biggest economies have banned binary options in some form. Do your homework before committing any capital. Avoid brokerages that suggest risk-free trading, offer outsized payouts, “free” money to trade, or provide other enticements usually found in shady gambling operations, not investment platforms.
Once you decide who to invest with, you must figure out which bet you want to make. Choose an asset you are bullish or bearish about, and select a suitable strike price and expiration time or date.
High-Low Binary Option Example
The most common binary option, high-low binary options, involves predicting whether the chosen asset will trade above or below the strike price when it expires.
Suppose you think the S&P 500 index will rally for the rest of the trading day, and you buy an index call option. It’s trading at 1,800, so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date supported by your analysis.
You can choose an option that expires in 30 minutes. If the S&P 500 is above 1,800 at that time, you will receive 70% plus your original stake or lose the entire stake if it is below 1,800. Minimum and maximum investments vary from broker to broker.
Suppose you invest $100 in a call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price or the (bid + ask) divided by two. Each binary options broker outlines its own expiration price rules.
In this case, let’s say the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price is below 1,800, you will lose your original $100 investment.
If the price expires exactly on the strike price, it is common for the trader to receive their money back with no profit or loss, although brokers may have different rules. The profit and original investment are added to the trader’s account when the position is closed.
Types of Binary Options
Besides the high-low binary options, international brokers typically offer several other types:
One-Touch
To make money, the traded instrument must touch the strike price once before expiration. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date and time.
Range
Meanwhile, a “range” binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if the price stays within the range, while the investment is lost if it exits the range.
Additional Binary Options
As competition in the binary options space heats up, brokers offer additional products that boast 50% to 500% payouts. While product structures and requirements may change, the risk and reward are always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured so the probability of winning the payout is very low.
Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most don’t. Exiting a trade before expiration typically results in a lower payout (specified by the broker) or slight loss, but the trader won’t lose their entire investment.
Risk and Reward of Binary Options
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Seem simple but can actually be complicated and riddled with stipulations
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The reward is always less than the risk when playing high-low binary options
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Losing trades cost the trader more than they can make on winning trades
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Susceptible to fraud, particularly outside the U.S., where markets are often unregulated
Binary options offer a straightforward proposition: either you win a fixed amount or you lose a fixed amount. Unlike other types of trading, there are generally no commissions or fees involved when trading overseas. The decision-making is streamlined, as traders only need to predict whether the underlying asset’s price will go up or down by expiry.
However, the simplicity of binary options belies the significant risks involved, particularly in the overseas market. Traders should be aware that fixed payouts mean that even if an asset’s price moves dramatically in your favor, you will only get the predetermined payout. Conversely, you will lose your entire investment if the price moves against you even slightly.
Moreover, while binary options that attract many traders by offering numerous strike prices and expiration times may seem attractive, unscrupulous brokers can also use these features to stack the odds against them. The lack of regulatory oversight in many international markets heightens these risks. Many operations look like robust online operations one day and are dead links the next.
Those who use them suggest there are some potential rewards. You can access many asset classes anytime a market is open somewhere in the world, providing prospects for diversification and round-the-clock trading. The fixed payouts also allow for more precise risk management, as traders know exactly how much they stand to gain or lose on each trade.
On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses.
While payout and risk fluctuate from broker to broker and instrument to instrument, one thing remains constant: Losing trades cost the trader more than they can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk, but the percentage of winning trades will be lower.
Finally, OTC markets are unregulated outside the U.S. and there is often no government oversight when there’s a trade discrepancy. While brokers often use external sources for quotes, traders may still find themselves susceptible to unscrupulous practices.
FINRA has warned that binary options and their trading platforms are often a source of scams. Lots of users have reported that their deposited funds have disappeared and that they were asked to pay a fee or tax to receive their investment assets.
Warning signs include being asked to deposit more funds and excuses being rolled out when the customer asks to withdraw gains or close an account.
Why Are Binary Options Illegal?
They aren’t wholly illegal in the U.S., but trading is limited to regulated exchanges that must apply for approval with U.S. regulators. Many in the U.S. still trade with overseas platforms, but the CFTC, SEC, and FINRA—often in regulatory turf battles and not always on the same page regarding certain investment products—have multiple times issued unprecedented joint releases about the perils of binary options trading with unregulated exchanges. Given the frauds uncovered time and again, their worries on behalf of American investors are well founded.
Are Binary Options and Event Futures Different?
Binary options and event futures are both financial instruments that allow traders to speculate on the likelihood of future events. Event futures, like those offered by the Chicago Mercantile Exchange and Kalshi, are exchange-traded contracts that allow traders to buy and sell based on the probability of a specific event occurring. These events can be related to finance, such as the predicted price of Bitcoin or commodities, or they can be non-finance-related, such as the weather in different cities or the outcomes of awards shows.
Meanwhile, binary options are typically offered by individual brokers rather than on regulated exchanges. Traders place bets on whether an underlying asset’s price will go up or down within a set time frame. If their prediction is correct, they receive a fixed payout; if incorrect, they lose their entire investment. In countries like the U.K., event futures are regulated under gambling laws. Binary options, meanwhile, are often traded in markets with limited regulatory oversight, which can expose traders to a greater risk of fraud or unfair practices.
Are Binary Options Suitable For Beginner Investors?
Binary options are often marketed to beginners because of their simplicity. However, they may not be the most suitable investment for all beginners. The all-or-nothing nature of binary options can make them quite risky, and the potential for quick losses may not align with some beginner investors’ risk tolerance or investment goals.
The Bottom Line
Trading binary options outside the U.S. may appeal to some investors. Foreign markets can offer greater investment choices and flexibility regarding the terms of the trade and ways to win or lose. They can also provide potentially more competitive fees. But there are also downsides. Most binary option brokers are unregulated, and some are shady and rip their customers off. If you plan to trade binary options abroad, do your homework first and be extra cautious before depositing capital.
