Say you walk into a casino with a wad of your hard-earned cash burning a hole through your back pocket. You buy a bunch of chips and eagerly scan your surroundings. Finally you see it sitting there seductively, the very centre of attention, glamorous, iconic, just waiting to help folks part ways with their money (I'm talking about the roulette table by the way). So you mosey on over there and slap down a handful of chips on black, only to be told by the croupier that the rules have changed, that it is incumbent on him to make you aware that the payout for a successful black or red wager is now 75% and not 100% as it has always been. Well, you'd be perfectly within your rights to tell him to go and four-letter-word himself as you hastily gather your chips and make a swift exit.
Well the same goes with binary options. You are essentially placing a 50/50 wager on whether the price of a security will rise or fall based on the price at entry, compared to the price at exit, or expiry. It's a 50/50 bet, no-matter what they tell you. And yet you only ordinarily get 70-75% back for a successful 50/50 forecast. Now the payout structure changes depending on the broker in question but they ordinarily say 65-91%, or something close to that. Overwhelmingly though, the payout on most binary options is 70-75%. So in other words; even if we leave out all the rest of the cheeky ways that binary options brokers stack the odds in their favour, even if we completely ignore the whole sordid laundry list of less than transparent dealings we can get into in later posts, even if they genuinely are all 100% above board, the very payout structure that they are advertising as being high as hell maintains their statistical house advantage at all times.
So just how high are these payouts when you really think about it? In order to make significant profits you have to wager significant amounts. Binary options brokers do not offer leverage, in fact discuss it as some sort of diabolical trick to magnify your losses and wipe out your account balance (it's not, but more on this later). So in essence what you are doing is wagering 50/50 and making 75% back, so if you keep your stake the same you have to be right 1.25 times for every 1 time your trade expires out of the money, and that's just to break even. Now when you combine this with some of the other features of a binary trade you begin to see that it's not a very attractive deal at all.
Next time we'll look at another one of the binary options myths, that being able to trade at very short durations gives you an advantage over other traders. This necessarily ties in to the high payout myth so keep this post fresh in your mind when reading Part Four.
As always, don't hesitate to contact me at [email protected] if you have anything to share.
George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.