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| A '''binary options trading platform''' (also called binary options web site) is a web-based, over-the-counter, real-time trading system, which offers nonprofessional investors a way to wager on the short-term price movement of some ] (e.g., stock, commodity, currency, index) by buying ] on that asset. | |||
| Binary options platforms have been growing rapidly since mid-2008. It is estimated that around 90 such platforms (including ]s) have been in operation as of January 2012. | |||
| The platforms offer standardized short-term binary options with a pre-determined profit/loss, that cannot be liquidated (buy or sell to close) before expiry. These binary option platforms offer options on some 70 underlying assets.<ref>{{cite article|last= Wachtel |first= Cliff |title= Trading Thursday's ECB Press Conference Using Forex Binary Options |url= http://seekingalpha.com/article/256090-trading-thursday-s-ecb-press-conference-using-forex-binary-options|work= Seeking Alpha|date= 3 March 2011|accessdate= 31 March 2011}}</ref> | |||
| == Trading Platform == | |||
| Trading on binary option platforms can be done with little to no knowledge of the stock market. An investor will only need to choose whether the price of some asset (underlying asset) will be higher (in the case of a ]) or lower (in the case of a ]) at the option's expiration. Binary options are offered for a time period of 60 minutes or less and are traded until 10 minutes before expiry. | |||
| Once a trader places a trade, he sets the ] of the underlying asset as the ] for the option. From that moment on, if the price of the underlying asset increases and closes above this strike price by even as much as one ] the option will expire in the money (for call option). If the price of the underlying asset hasn’t changed at expiry, the investor receives his money back. | |||
| As opposed to exchange-traded binary options providers such as ] (Amex) or ] (CBOE), the binary options platforms do not charge any direct fees from investors buying an option. | |||
| The profit to an investor from an option that expires ] will usually be between 61% to 85% of the initial investment (depending on the underlying asset).{{Citation needed|date=December 2012}} In case of expiry ], the investor will get a rebate of between 0% and 15% on his investment.{{Citation needed|date=December 2012}} On most platforms there is a minimum amount for an investment, starting from as low as $10. | |||
| ==Examples of binary option trades== | |||
| A trader believes that ] stock (NYSE:MCD) will close above the current (spot) price of $74.93 by the end of the hour. The trader can invest $100 in McDonald’s binary call option on that outcome. If his prediction is correct his payout is $170 (70% profit). If he is incorrect and the stock closes below the strike price he loses 85% of his investment (gets a rebate of $15). | |||
| Another common form of binary option that is traded is a touch/no-touch, also called one-touch binary option. In one-touch binary option, if the price of ]'s stock (NASDAQ:GOOG) is at $495 and a trader predicts that the stock will "touch" the $500 mark during the trading period he can buy a one-touch option. Once the stock's value "touches" the $500 mark, the trader would immediately earn a 60%-70% gain. If the stock doesn't touch the predicted range by the end of the trading period, the trader looses 85% to 100% of the investment. | |||
| ==Business model== | |||
| The platforms do not charge fees from their investors. Their profit comes from the difference between the options that expire in the money to options that expire out of the money. This difference can be found by the formula below. In this (for each base asset with same expiry characteristics), '''(W)''' is the in the money option payout in percentage terms (e.g. 1.7), '''(L)''' is the out of the money option payout in percentage terms (e.g. 0.15), '''<math> (V_{1}),(V_{2})</math>''' are the turnovers of transactions made for each outcome (e.g $1,000), '''(S)''' is the platform's gain. | |||
| :'''<math> S = - </math>''' | |||
| In this example the platform's turnover is $2,000 and its profit is $150 or 7.5% on turnover. As the platform’s gain comes from the above formula, most platforms will be indifferent as to the outcome of a single trade. Note that if '''<math>V_{1}</math>''' is not equal to '''<math>V_{2}</math>''' then the platform will have to act as a market maker. This can cause the platform gain '''(S)''' to be more volatile than in the above formula. In order for a trader to make a long term profit he has to predict correctly roughly 54.5% of the time (depending on in-the-money and out-of-the money payouts).<ref>{{cite article| last= Thachuk |first= Rick |title= binary options - how to design and test a trading system |url= http://www.fointelligence.com/Article/2793838/Comment-binary-options-how-to-design-and-test-a-trading-system.html|work= FOIntelligence |date= 24 March 2011|accessdate= 31 March 2011}}</ref> | |||
| ==Regulation and compliance== | |||
| On non-regulated platforms, clients’ money is not necessarily kept in a trust account, as required by regulation, and transactions are not monitored by a third party to ensure fair play.<ref>{{cite article|title= warning against unauthorised websites offering binary options trading|url= http://www.fma.gv.at/de/verbraucher/investorenwarnungen/internationale-warnmeldungen/detail-internatwm/article/warning-against-unauthorised-websites-offering-binary-options-trading.html|work= AMF|accessdate= 14 January 2012}}</ref> On May 3, 2012, the ] (CySEC) announced a policy change regarding the classification of binary options as financial instruments. The effect is that binary options platforms operating in Cyprus (where many of the platforms are based) will have to be CySEC regulated within six months of the date of the announcement. CySEC is the first EU and MiFID-member regulator to treat binary options as financial instruments.<ref>{{cite article|title= regarding the supervision of Binary Options|url= http://www.cysec.gov.cy/Downloads/English/Announcements/2012/EPEY/Announcement%20%2005.03.2012%20regarding%20the%20supervision%20of%20Binary%20Options.pdf|work= CySEC|date= 3 May 2012|accessdate= 4 June 2012}}</ref><ref>{{cite article|title= CySEC regulates Binary Options – will the FSA follow?|url= http://leaprate.com/forex-industry-news/entry/cysec-regulates-binary-options-will-the-fsa-follow.html|work= LeapRate.com|date= 8 May 2012|accessdate= 10 August 2012}}</ref> | |||
| ==Criticism== | |||
| These platforms may be considered by some as gaming platforms rather than investment platforms<ref name=Forbes>{{cite article|last= Pape |first= Gordon |title= Don’t Gamble On Binary Options|url= http://blogs.forbes.com/investor/2010/07/27/dont-gamble-on-binary-options/|work= Forbes.com|date= 27 July 2010|accessdate= 15 April 2011}}</ref> | |||
| because of their negative cumulative payout (they have an edge over the investor) and because they require little or no knowledge of the stock market to trade in. According to ], writing in '']'':<ref name=Forbes></ref> | |||
| ::''"If people want to gamble, that’s their choice. But let’s not confuse that with investing. Binary options are a crapshoot, pure and simple."'' | |||
| ==References== | |||
| {{Reflist|2}} | |||
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