(This is a guest post. A rather breezily-written one, but I think you'll like it. If you want to guest post here and on hundreds of other sites, sign up for a PostRunner account.)
So what do you get when “making money online” meets the exotic world of financial derivatives? The answer, it seems, is a toxic mutation known as binary options.
Now, most people understand that an “option” in financial terms means an agreement to buy or sell something at some specific point in the future, but using the price as it stands right now.
It costs to acquire an option of course, but if the price moves up by say 10% from what you agreed to pay then you can clearly do rather well for yourself. If the price moves against your expectations then you can cancel the right to buy (which would otherwise give you a thumping great loss) and all you lose is the cost of the option.
Obviously you can also place an option the other way if you're aiming to sell, which makes options a useful tool for insuring against the unpredictable. And indeed they are widely used to smooth out wild swings in many markets and make the world a safer, duller place.
However, for those who might not be familiar with the world of binary options trading it's … err … somewhat different. Think futures trading or online Forex dealing but a whole lot easier, a great deal faster and profits of around 80%. (Yes, really!)
Because you're not acquiring a right to buy or sell something, just guessing whether its price will go up or down over some (usually quite short) period of time. If you buy an option for say $100 you really can walk away fifteen minutes later with $180 in your pocket. Sounds great, doesn't it?
Binary options akin to gambling? Well … do you feel lucky?
But that's assuming you “won.” Won? Sounds like some form of gambling? Well, it is, and what the slippery toads selling this stuff play down is that if you guess wrong (lose) then you walk away with absolutely nothing.
Now you understand why they're called “binary” – one or zero, win or lose, all or nothing. Only it's not quite all or nothing is it? It's actually +80% or -100% which isn't exactly a level playing field. This means that in order to break even you need to guess right 5 times for every 4 times you call it wrong.
To actually make any money at all you really do need to be remarkably good at predicting the future. You also have to know enough math to figure out the optimum allocation of money to each bet (or “trade” as it is euphemistically termed) otherwise you risk either not making the most of your winning predictions or, worse still, being totally wiped out by just a few losing ones.
Not to say that it can't be done though. You are after all usually making predictions about very specific events in a very specific field, such as the value of one currency against another later that same afternoon for example. You can also fall back on well established and not overly difficult mathematical formulas for determining how much to wager each time (the website mentioned at the end of this article even provides an online calculator based on the famous Kelly Formula).
But perhaps the biggest problem is, you want to trade binary options, so… who you gonna call? No, not Ghostbusters, but one of the few online retail brokers who has this business all stitched up (and will cheerfully do the same to you). These are the kind of folk who make the kind of folk who would sell their grandmothers for a cheeseburger seem vaguely decent.
And they are not about to play it straight with you, so expect them to take more than they're due, pay out less than you're owed and relentlessly manipulate things to favor themselves — a favorite stunt being to call the option at a time more beneficial to their position than the actual time agreed.
So if you're ever tempted to wonder what happened to last year's gurus with good hair who fleeced the gullible by the thousands with prettily packaged hot air, there's a good chance they're now calling themselves binary options brokers.
Anyway, there you have it, as an exercise in financial management, binary options trading is pretty much right there with payday loans, buying lottery tickets and trusting to the Law of Attraction while sniffing the tune to La Marseillaise with your snout buried in a trough of Bolivian Marching Powder.
In other words, one of those activities that it is best left to Munchkins.
This sage advice was brought to you by Eddi Baxendale, author of this related article about binary options trading.
What’s always drawn me to options was the concept of leveraging your investment, You either win big or lose small. Unfortunately my experience with options had more small losses than big wins! So I’ll stick with my Stock strategies, if I do go into options it will be to cover any stock positions I’m in 🙂
I used to do some day trading and I went into options, where I made some pretty big chunks of money but also lost some really big chunks as well. In the end it was just too nerve wracking for me to continue. Now, I often look at something and say ‘Man, I thought about that and if I would have gotten the option behind it, I could have made big’ but I also am smart enough to know that I probably would have gotten in behind some losers as well.
I just wrote an article about a legitimate option trade.
If Apple, currently $460 rises to $600 or higher by Jan 15, you can get a 4 to 1 payback. i.e. $2500 would return $10000. Gambling? Of course. But not an 80% return, and not short term. This has two years to occur. If Apple rises past $700 or so much sooner, you can unwind the trade for not quite the full $10K, but close.