Financial Education Clearinghouse

Binary Options: What You Need To Know

A binary option is a simplified options contract that looks more like online gambling than a traditional security or investment. The binary option contract is based on the investor’s prediction of an underlying security’s value at a predetermined date. There are only two possible outcomes: the investor may receive a fixed amount of money for guessing correctly, or lose the entire investment for guessing incorrectly.

Example

For example, an investor enters into a binary option contract worth $100 that promises to pay the investor a 95% return if Company ABC’s stock rises from its current trading price of $20 per share to $25 per share by a certain date. If it does, the payout is 195% of the contract’s original value, or a total of $195 ($100 + $95). If it doesn’t, the payout is $0 – a complete loss of the original investment

Beware of Scams

While some binary options are offered on a registered exchange or a designated contract market subject to SEC and CFTC oversight, the amount of Internet-based trading platforms has surged in recent years. Many are these platforms are unregulated or are completely illegal.

Binary option contracts are an attractive strategy for scammers because they target unsophisticated investors with a simple-to understand “investment opportunity” and a perceived low entry cost. The contracts can be executed for hourly, daily or weekly terms. Illegal or fraudulent binary option issuers and platforms have refused to pay out on investors’ contracts; have stolen and sold investors’ personal and financial information, such as bank account and credit card numbers; or have based the platform on software that favors the scammers by generating losing trades for the investor.

Before You Buy

Before considering binary options, check with the following regulators to verify registration:

Binary option registration:

SEC Edgar
Canadian Securities Administrators National Registration Search

Trading platform registration:

SEC
Commodities Trading Futures Commission

Financial professional licensing:

Washington State Department of Financial Institutions - 1-877-746-4334 or FINRA’s BrokerCheck.