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What is Binary Option Trading? Learn the Facts

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Written by Timothy Sykes
Updated 4/20/2023 8 min read

Binary option trading is a deceptively simple trading method. You either profit or lose everything depending on whether your price prediction is right.

Can they provide big gains? Yes. Can you lose a lot of money on binaries? That’s more likely.

There are winners and losers in every trade, but the reality is that most traders lose because they’re just gambling. And that’s exactly what binary options are for.

I don’t trade binaries — I think there are better options out there.

Are binary options a scam? That depends on the binary options broker.

Binaries are being outlawed in more and more places. Because of this, binary brokers are often found in countries with poor regulation.

Don’t want to trade binaries? I commend you… Regardless, knowing more about the market is always good.

What Is a Binary Option?

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A binary option is a type of options contract where you win or lose money based on the underlying asset’s price at expiration. Traders guess whether or not an option will meet or exceed an extremely short-term strike price by answering “yes” or “no.” That’s where the term binary comes from.

In options trading, there are ways to refine your strategy and limit your risk. Binaries are pure speculation — essentially, just betting.

And in betting, the house always wins.

The binary even extends to your losses and gains. American binaries either pay out $100 or nothing. Some people call them “all-or-nothing options.”

Besides stocks, you can speculate on different kinds of markets with binary options contracts. Here are five examples:

  • Foreign currency pairs
  • Stock indices
  • Commodities
  • Crypto
  • Economic events

How Do They Work?

The binary options market works differently in different countries. American binary exchanges work similarly to sports betting, with lines and odds.

Like sports teams, the “favorite” position on a stock or commodity is more expensive to buy but more likely to happen. Meanwhile, the “underdog” side of the transaction is cheaper but less likely to occur.

American binary options always reward you with $100 if you get it right. So, the higher the buy-in, the less you’ll profit on correct guesses.

The U.S. has two regulated binary options exchanges, Nadex and the Chicago Board Options Exchange (CBOE). You’ll find many more binary exchanges online.

Be careful with online binary exchanges — they have even larger house fees.

That’s the least of your worries… Many of them are outright scams and fronts for identity theft.

Real-Life Example of a Binary Options Contract

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Need a real-life example of a binary options contract? Here’s one in action:

Let’s say there’s a binary option on Tesla Inc. (NASDAQ: TSLA) shares being above $190 at 2 p.m. Eastern on March 7.

Two hours earlier, when you entered the trade, it was chopping around $189…

You think it will stay below $190, which is the most likely outcome. Nevermind that it’s currently below that strike price, just look at this downtrending chart:

Since you’re taking the most likely position, the binary option costs $65. You’ll make $35 if you’re right, but lose $65 if you’re wrong.

Uh-oh — the stock spikes mid-day. It’s sitting at $190.78 when it expires. You lose the entire trade.

See why I don’t like this trading strategy? If you had been shorting Tesla, you’d either have covered during its lunchtime spike past $193, or held on through its close below $188. You would have made some money or cut your losses — but either way you wouldn’t have lost everything.

You can still use delta to see a binary option’s value. Check out my guide to delta in options trading.

Pros of Binary Option Trading

Binary trading is a risky financial product, but that doesn’t mean it’s all bad. There are some benefits to it. You’ll have to decide whether the good outweighs the bad, though.

Here are three benefits of binaries:

High Return on Investment Potential

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The potential profits and average returns with binary trading are relatively high. The “prize” is fixed at $100, but you can buy binary options with low fees to maximize return potential.

Known Risk and Reward

Your risk and reward is fixed in binary option trading. If you win, you get $100, but your initial investment is gone if you lose. Your risk is limited, which is key in trading.

Easy to Understand and Low Barrier to Entry

Binary trading is really simple. You know the win and loss conditions and how much you can make (or lose).

Will the current price exceed a certain point — yes or no? If you’re right, then you win money. If you’re wrong, you lose the buy-in.

Cons of Binary Option Trading

Binary option trading doesn’t have the best reputation — that’s because many traders lose a lot of money.

Here are some things to watch out for with binary options:

Lack of Regulation and High Fraud Potential

Once you get past the legit exchanges — Nadex and the CBOE — binary exchanges are the Wild West. You’re more likely to be scammed with binary options than other trading methods.

Many binary options providers try to tempt traders. They promise them “an easy path to riches” and other get-rich-quick sentiments. They’re most likely scams. Binary options providers get closed down around the world every day.

Some unsavory binary options websites refuse to reimburse funds to customers. They even engage in trade manipulation.

Many of them operate in unregulated jurisdictions, away from financial authorities and lawsuits.

Not every online binary trading platform is a scam… just enough to make me never want to trust any binary website.

Big Loss Potential

Binary options trades are all-or-nothing financial products. If you lose, then you lose your entire investment. That’s the number-one thing to avoid in trading…

No Loss Prevention Method

In stock trading, you can cut your losses quickly. In options trading, you can let an option expire or trade it.

You don’t have any loss-prevention tools in binary options. If you lose, you lose everything.

Curious about options trading — a more strategic options form? Read more about its history and how to start learning it.

How Are Binary Options Regulated in the U.S.?

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Binary options have been legal in the U.S. since 2008. But this only covers binaries on regulated American exchanges, Nadex and the CBOE.

The SEC regularly warns traders to avoid other binary options platforms.

How to Trade Binary Options

My advice: don’t trade binary options.

It’s hard to get an edge in binary options trading. They’re more like gambling than trading.

They rely on luck, not knowledge and experience. That’s the opposite of what trading should be.

Regular options trading is more reliant on trading skills. That’s what my former student Mark Croock teaches in his Evolved Trader program. He’s taken my penny stock strategies and applied them to options trading — making $3.9 million in the process!

Here’s a sneak peek of Mark’s curriculum:

Sign up for the Evolved Trader program today and start your journey towards becoming a self-sufficient options trader!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”