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Why Binary Options Are Not Completely Useless

Jul. 10, 2013 2:07 PM ET1 Comment
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Seeking Alpha Analyst Since 2013

Well, as serious investors we tend to mock Binary Option "traders", sometimes even to their faces, as can be seen here: OnlineTradingScams.com

We all know the story - within a one hour timeframe any financial asset is subject to statistical noise and the probability for it to go either way is 50%, making it more gambling or coin tossing than investing, and with the 81% pay-off (and the ridiculous 15% "protection") the actual expected value is: 0.5 X 181% + 0.5 X 15% = 98%. This translates to getting 98 cents for your dollar. Just like in the roulette...

But here is what comes to my mind - like it or not, they will give you a HUGE leverage on your money, and that is not easily accomplished for people that trade with 5,000$ - 10,000$.

One can argue that the timeframe in which the trade is made (one hour normally) it's not a trade but a random 50% scam, and for the most part I'd agree. Unless it's a very specific hour.

Let's say for example that you have monitored an index closely, including the fundamentals and of course read all the analyst reviews and for some reason (and we all have those once or twice a year) you are absolutely certain that you know the outcome of a macro data or what will the fed say in an announcement that is due in half an hour. This is where it gets interesting.

So let's assume that you know that Google is about to publish some bad quarterly reports, that will be published in 30 minutes or so. In your opinion the stock will respond with anything between a 3% and a 6% drop. You are so sure about this that you are willing to wager your entire trading capital which is 5,000$ in this. What are your options?

1. Short the asset - in this case sell Google stocks. Congrats! you've just made 150$, on the positive end you haven't risked too much money either.

2. Short the asset with leverage \ sell future contract - in this case you are actually telling your broker "sell as many Google stocks for me as possible with 5,000$ margin". Most brokers will probably not even allow you to short with suck a small amount of money, and if they will, they'd go for a 25% margin, which means you sold 20K$ worth of stocks. so now you've make 600$, an improvement.

3. Buy normal "real" options. This is probably the worst option - since for all you know the stock will loose 3% if you want to make some real profit you need to get a deep out of the money option, and those normally don't have volume which means you'll probably pay 10% above it's fair value. But this will only come to happen IF the asset has options, IF the expiration date works for you, and let's face it - IF and only IF you have a formidable knowledge of option trading which you probably don't since you only have 5,000$ to trade with... but yes, in case all of the above happens, you can actually make even 300% for this trade, but you have more chance of winning the lottery.

Let me offer you a new thought - just buy the damn binary option. you'd make 81% and that is way more than the other options.

Only one problem with this - Ain't no body gonna read such a long post, because anyone educated enough to understand what I said would automatically close the window after hearing the words "binary options", and that makes me sad.

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