Ep 141: Binary Options – Scam or Legit?

June 29th, 2017

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Today I want to share with you some insights about binary options. I want to show you the truth regarding binary options.

Are they scam or are they legitimate?

My goal is to share with you some insights to protect you. And to give you some insights about these trading vehicles. That way you understand what you're doing and what you're getting into.

First Things First - How You Classify a Scam?

Before you go any further, it's important to understand how you classify a scam. There are different levels. At certain levels, some people get taken advantage of, and they're wiped out financially. That is the case if we're talking about a financial scam.

At other levels, it's possible for you to be able to be successful, but the odds are not in your favor.

For example: If you're starting a business is it a scam if more than 90% of business owners fail?

When you look at a restaurant business, so many business owners fail in the restaurant industry. It's a complicated business, and it's a challenging industry. People still don't classify that as a scam. The reason is that it's a legitimate business.

Binary Options Business - What's The Truth?

With binary options, the same thing happens. Can you make money with binary options?

The simple answer is yes. However, the odds are stacked against you.

Take for example a restaurant business that you start in the middle of the desert. Can it work? It can, but there's no foot traffic. You might get someone running through that desert once every six months to a year. And in that case, it's possible.

You'll make some customers, money because you're the only thing out there. But the reality is the odds are stacked against you. If you have a restaurant in the middle of downtown New York your odds of success now become higher.

When you look at binary options can you make money from them? Yes, you can. But is it favorable for the risk to the reward that you're getting? No, not really.

This is why I don't care for it to say that it's a scam, but I do look at it as its not favorable. The odds are not in your favor and more than likely you're going to lose your money. That's a short and straightforward answer.

However, we'll go deeper and look at understanding how they work. That way you'll get some insight into the whole process of the binary options.

Learn How Binary Options Work

The first thing I want to share with you is how binary options work. There are a few factors involved in the working process. It's not much different than a regular standard trade in the stock market that you would put on.

First, you choose the trade, the vehicle that you want to trade. You pick a direction which is a little bit easier. When it comes to the stock market, there's a lot of hedging and things that you can do. With binary options it's binary.

You have one or the other. You choose up or down. There's no hedging involved in those kinds of things. There's also how long. You choose the time, the timeframe.

Usually, they're short:

  • 1 minute
  • 5 minutes
  • 10 minutes
  • 20 minutes
  • 30 minutes
  • 50 minutes
  • 1 hour

They're not ten days or 50 days. They're not a long time frame.

Then you choose your size or your bet. Then finally you select the return to player rate. You check all these things. If we were to take a look at a binary option quote window here is what it looks like.

I drew it out so that I can avoid taking screenshots of any particular company. You have this Euro versus the US dollar. You choose your trade vehicle. This is the trade that you want to do. This is where are you putting on the trade.

In this example, we'll be using oil. But you have your Euro/USD. This is the trade you're looking at. And here you'll have your graph or chart of what's going on and what's happening. Here you have your payout rate (green). This is determined by them what they're going to pay out and when it expires. It would be at 3 o'clock today (for example).

Now you get to choose do you believe that at 3 o'clock today that this is going to be higher or lower. Of course based on the chart at the end of that timeframe. It's got to be at the end of that time frame. That's when it expires. You have now a call which is similar to regular stock market jargon.

You have a call that if you believe it's going to be higher, you buy the call. If you think it's going to be lower, you buy the put. Or you invest in the put.

What Happens After You've Made a Decision

What happens next is if you're right you get a 70% payout. If you're wrong and it went lower at this timeframe, you lose your full money. Take it this way. If you put in $500 and you're right, you take $500 you multiply that times 70% and that's your final payout. But if you're wrong, you lose that $500.

You get that point. You don't have the opportunity of taking half your position off or anything like that. It's either you're right, or you're wrong. That is it.

When it comes to oil, this is the case. You have a payout rate. You have what time it expires. Then you choose the call and the put. There is a little graph. Then you also decide how many shares you want to trade. Or what size of bet you want to put on and that is it.

  1. You are RIGHT - you get 80%
  2. You are WRONG - you lose your whole investment.

Look at evaluating risk to rewards. Here's how binary options work.

You put the risk of $1,000, and the payout is 80% like we've discussed. You're going to get that additional $800. It seems like a great deal of money. When it comes with standard options what can happen if you're still risking $1,000, but that reward can be $2500.

It can be $5,000, and you can also manage and reduce your risk. That's the biggest thing that you need to understand when it comes to binary options. You don't have the leverage or the chance to reduce and manage your risk.

Look at the stock market. When you buy a stock the normal tendency of that stock is for it to go up. A stock should be growing. It's a company, and it should be growing in the future. That's the case especially if you're buying a big company that knows what it's doing. The natural tendency is for it to go up.

You have to look at things moving against you in the stock market. If you want to sell a part of your position you could sell half, a third or a quarter. Let's say you buy a stock at $50. You could sell half of your position if you had 100 shares. A little bit higher a week a month a year later.

With binary options, you have that time. That time is set, and whatever happens at that time you either win or lose. That is it. You cannot sell half, a quarter, a third. You can't hedge from the short side and multiply the positions.

It becomes more complicated because you have unlimited abilities. Think of it like when you're trading blindfolded. You can't hear anything, and nobody can give you information about what's happening with the trade.

But you have to make trades. That's what's happening with binary options. Your senses are entirely blind. The whole goal behind this business (when you own a binary options company) is for them to get you to trade more frequently.

The more trading that you do, the more likely you will lose out. Remember, it's like setting up a restaurant in the desert. They know that with time eventually the odds are stacked against you. The odds are not in your favor. They are in their favor.

Take A Closer Look at Evaluating Risk to Reward

Let me show you here on evaluating the risk to reward what this ultimately means as you look at stocks versus binary options or even standard options.

Take a look at how the binary option plays out when it comes to the risk to reward.

If you're looking at a regular stock or option and you're getting into entry points. When you go into this entry point, the stock can go up, or stock can go down.

One way is that you're doing it on a binary options way. I'll draw this in blue. As this continues to move higher your max profit (we are using $1,000) is $800. The reason is that it's 80% is the payout. That is your max.

When it comes to regular options/stocks, you don't have a time constraint. You can allow this to continue to run in the future. You may have some pullback, but you can let those things to run to a higher level.

What you have to see here is that your risk to reward is much higher. When you look at standard options, look at the reward potential. The reward is huge.

When you look at the reward for the binary options, there's a smaller of a prize. In the first case, you made $3000-$4000. It's a lot on your options, but you could let it ride. You don't have the stress of the time frame, the frequency of getting in and out of trades.

In the second case on your $1,000 investment, you had a potential of a much more significant loss. That's because you would lose your full $1,000 investment.

  1. You're risking $1,000 - to make $800
  2. You're risking $1,000 - to make $3000

The first case sounds excellent for a lot of people. That sounds great. In the second case, you risk the thousand to make three times your money. Maybe it took a little bit longer, but it's a three to one risk reward.

Whereas here it's almost like a one-to-one. But the odds are stacked against you because of the time constraint. And you don't have the flexibility to manage that position.

What's The Main Problem When It Comes To Binary Options

When you start having a stock and you get into entry point you're looking for expansion to the upside. Let's say things go against you. In that case, this stock starts moving lower. In a regular stock, I can get out of this stock earlier. That's great about this stock.

This is what may happen. Out of that $1,000 that I put in I may decide I only want to take a $200 loss. With binary options, there's no $200 loss. It's $1,000. You're losing your full investment. That is the biggest problem. That's the issue when it comes to binary options.

Here's the other great thing with stocks or regular options. Even they are better than binary options you could sell half. That way you sell half, or a third, or a quarter. And when the stock starts heading back down to your entry point at least you took half of your profits.

With binary options, you don't get a chance to do that. You either win, or you lose. That's it. It's a binary system, two-way system - win or lose.

This is the truth: So many people are attracted to this. There's a lot of different reasons. But these companies that allow you to trade binary options they know their statistics. They know whether you're going to make or lose money. And they know that most of the time you're going to lose money.

That's why they can attract you with these higher payouts. They can tempt you in all these ways.

Why Are People Attracted to Binary Options?

There are a few simple reasons:

  • Binary options are easier to understand than regular stocks or options
  • Huge marketing push from affiliates
  • Fast money or suck you in for the 'get rich quick.'

There are more complexities to stock investing, choosing the right stocks, and looking at the dividend. Reading the charts, understanding the charts is possible in much more detail.

Usually, people are frustrated with regular investing. They want to do something different. Maybe they gave up. They start looking at binary options, and they are typically much more straightforward.

There are only a few components:

  • you choose up or down
  • you select your size
  • you look at the payout

And that's what you get. It does seem easier. However, the probabilities are against you. What happens is people get attracted to these things because of enormous marketing pushes from affiliates.

Which means those people that are pushing these things to get commissions. They usually get huge commissions. The reason is that they're trying to make their money back from the losses.

If you get somebody to sign up under your account or your name, then you also will get extra trading credit.

Quick example:

Let's say you put in $5,000 in your binary options account. Now you may have another $5,000 or $2,000, or for every person, you bring in to sign up. That way you get an extra $1,000 that you can trade with.

It's a huge marketing push, and they have to bring more and new people into the system continually. All of this attracts people who want fast money. It sucks you in for the get-rich-quick. You can get rich quick - that's what they teach you.

They show you, and that's how they attract you. They use things like cars, the guy that made $50,000 trading binary options. Or this a teenager can even do it. Here's the car you can own, or the vacations you can take. You get the picture.

You can trade while you're in your underwear. And you can trade while you're on vacation. All these things start to suck you in for the get-rich-quick.

That's the case especially if you don't have a lot of money. If you're a person with less than $10,000 in your bank account and you're looking to grow your life. Then you start seeing these things that you get attracted to.

They show you how easy it is. Because you need to decide up or down, you can see that it just plays on your natural human characteristics - the greed side. That's what it does.

Imagine this scenario:

I can say something like this. I can promise you'll be a stock trading millionaire if you bought all my courses, books and had 50 consultations with me. Go ahead, hit The Buy Now Button. And I can almost guarantee you most people will not. Maybe one or two will, but the thing is if I said something like that it sounds so ridiculous.

That's because I'm pushing you to the sale so quickly. Go ahead and buy everything right now. However, if I start you know doing it a little bit more subtle it can be more successful.

I say buy my video course, and then you can have this Ferrari. Or buy this book and check out the lifestyle that I have. If I did that and started pushing these kinds of things the environment that I would have on my channel would be completely different. And those are not the type of people I'm looking to attract.

For you, if you're able to push these get-rich-quick things away, then that's a good thing. The main reason is you'll start seeing the perspective. And this is what ultimately happens. A lot of people, unfortunately, get sucked into this.

Important note: if you're reading this post, and watching my channel video, you have to know that there are no quick riches in a stock market.

Can you do well? Can you make a great deal of money? Absolutely. But does it take a lot of hard work? Oh yeah, it takes a lot of education, a lot of hard work. And of course, it takes working capital to be able to trade correctly.

Not everybody can do it. The main reason is that not everybody is willing to look at things from an outer perspective. This is what happens with binary options. They suck you into this high of like a cocaine drug, and people don't realize it.

I've never taken any hard drugs or anything like that. That's because I'm already aware of and understand these things. And for you, that's what I want to do. I want to tell you that this is not something you should be doing unless you understand what's going on.

  • Can you make some money? Yeah, you can.
  • Can it blow up your account? Absolutely.

I want to let you know that this is something you need to be very careful about. It can blow up your account. There are no quick riches.

How These People Stay in Business?

I'm sure you're wondering something like this.

How do these companies that trade binary options or allow you to trade stay in business?

Here're some ways:

  • Saving on fees from taking the opposite of your trade
  • Affiliates and referrals
  • Bonus money

Well first off they save on fees from taking the opposite of your trade. Saving on taxes is one way that they do it. They don't even put your trade into the system. Because they know the majority of these people are going to fail.

They don't even put your trade in the system. They take the opposite side of your trade, and that's it. Because eventually with time as things expire you're done. You lose all of your investment. Most of the time that's what happens.

For some of the times, they do have to pay out. But then you'll trade more because you've made a little bit of winning. And then again you'll probably lose out on the next one if it's not the first one or the third one.

With the time that account starts to spin and dwindle. Then what happens is if you want to trade more and you want more money in your account this is going to happen. We'll give you another $1,000 if you get one affiliate or one referral and bring us that.

That way you have these people that start sending in these affiliates and referral code. We'll give you that bonus money for signing up someone else. Or what they'll do is this. If you do 30 trades in the next 60 days, then we'll give you three trades or an extra $1,000.

They'll give you bonus money for trading more frequently. There are all these different incentives. It incentivizes you to trade more frequently. The whole goal is that you trade more often. And the more often that you trade that slippage cost starts to happen.

Learn More About Slippage Cost 

If you've never heard of slippage cost, think of it this way. Let's say I buy a brand new camera for $700. One week later I say I didn't like the camera. I'll say I want to sell that on Craigslist. How much do you think I can get for that camera?

It's probably not going to be $700 unless I got a fantastic deal. But if I bought it new probably not. I could probably get it for $680. The slippage cost was $20 and let's say I do this time and time again. I buy the next thing - call it a laptop. Then I sell it on Craigslist.

It was $1,000, and I sold it for $900. I lost another $100. So you can see that now I've lost $120 simply by doing a transaction.

The more transactions that you do, the more you lose money. That's why for many people who look to preserve their wealth is they don't buy brand-new cars.

They try to last with the car because the more transactions, the more you lose out. Same thing with laptops, cameras, headphone, speakers...

The more transactions - the more slippage costs

That's what happens in these binary options systems. You do more transactions because they have that time constraint. The more transactions you do in, the lower the number of times the more money that broker gets from you. That's because you're losing more money from these slippage costs. You're slipping on your transactions. You're losing out.

Maybe it's not the first time, but it will be the second time. It's not the second time it'll be the third and the fourth time. What happens if you always lose money and it's called this churn effect that occurs.

Final Words

That's some insight for you regarding binary options and whether it's a scam or legit. You go ahead and be the decision-maker. The thing is the odds are stacked against you when you look at binary options. It doesn't mean you can't make money, but the odds are against you.

This is what happens with binary options. With time you're losing more and more through slippage costs. When you look at investing in a stock, the natural tendency is for things to grow. When it comes to binary options, it's all about getting you to trade more. It's all about giving you that get-rich-quick exposure so that way you trade more.

Eventually, most people lose most of their money in their account. Unfortunately, that's what's the sad part regarding it because we get so attracted to that get-rich-quick mentality.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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