What is binary options? High returns but what are the risks?

For traders looking for a tool to gain an advantage, binary options attract many because they promise high returns and clear risk management. But with advantage comes risk. Let’s understand what this trading instrument really is.

Definition of Binary Options: A Win or Lose Asset

Binary options are a financial instrument with only two possible outcomes—win or lose. You can make a profit or lose your entire investment. Traders invest funds to open a position and predict whether the underlying asset’s price will move in a certain direction. If the price moves as expected, the asset is “In the Money,” and the broker pays out a return. Typically, payout rates range from 70-85% of the initial investment. If the prediction is wrong, the asset is “Out of the Money,” and you lose your entire stake.

What makes binary options interesting is the very short expiration time—sometimes just 1, 5, or 15 minutes—meaning traders see quick results and can assess risk and opportunity even before starting.

How Trading Works: Call Option and Put Option

Binary options trading allows investors to open two types of positions, each with different mechanics:

Call Option: Betting that the underlying asset’s price will rise in the future. This trade yields a profit if the price goes up.

Put Option: Betting that the underlying asset’s price will fall in the future. This trade yields a profit if the price goes down.

However, binary options trading is similar to roulette—if your prediction is correct, you get your principal plus a return; if wrong, you lose everything. For example, you open a Call Option on GBPUSD at 1.3902 with a $100 stake. If after 5 minutes the closing price is above 1.3902, you receive $185 ($100 principal + $85 profit). If below, you lose the $100 stake.

Is Binary Options Gambling or Investment?

The answer depends on how you trade:

Unplanned Trading: Opening positions based on emotion, guessing randomly, without money management or analysis—this is essentially gambling because it’s no different from guessing.

Planned Trading: Analyzing the market, managing funds, calculating risks and opportunities—this can be considered a form of investment, though some gambling elements remain due to chance factors.

Legal Status of Binary Options: Leading to Bans

Since binary options are high-risk financial products, many regulatory agencies have issued warnings or bans:

Thailand: No clear laws support binary options trading yet. Investors bear all risks, and if issues arise with brokers, they cannot seek help from Thai authorities. They must sue foreign brokers themselves, which can be costly and difficult.

Other Countries that Ban Binary Options:

• Australia (2021): ASIC banned binary options, citing high risks and that only 20% of retail investors profit.

• European Union (2018): ESMA prohibited marketing and selling binary options to retail investors.

• Belgium (2016): Ban due to concerns over fraud.

• USA: FBI warns most sites are scams; not recommended for investment.

• Canada: Bans online advertising and options with expiry less than 30 days.

• Israel: Declares binary options as gambling, not investment.

• Germany: BaFin plans to ban advertising and sales to retail investors.

Binary Options vs. Forex: Which Is Better?

Both tools are popular among traders but differ significantly:

Similarities:

• Both allow online trading 24/5.
• Both require low initial capital.
• Both enable speculation on rising and falling markets.
• Correct predictions can generate substantial profits.

Key Differences:

Trading Hours and Flexibility: Forex markets operate 24 hours, 5 days a week. Binary options depend on the trading hours of the underlying assets.

Expiration Time: Binary options expire very quickly (1-15 minutes) and generally cannot be closed early (some brokers allow this). Forex trading can range from seconds to months.

Risk and Returns: Binary options have fixed risk and limited returns (50-80%). Forex is more volatile but offers leverage, potentially yielding 200% or more.

Profitability Potential: Forex has higher potential due to risk management tools like Stop Loss and Take Profit; binary options have fixed outcomes.

Which Should You Trade? Advice for Traders

Choose Binary Options if:

• You want clear risk limits before trading.
• You prefer quick trades (minute-by-minute).
• You can win over 80% of the time to ensure positive returns.
• You want to avoid price volatility affecting profits.

Choose Forex if:

• You seek higher returns even with lower win rates.
• You want flexibility in managing risk.
• You have time and skills for market analysis.
• You can accept higher risks.

Both binary options and forex were once considered tools for experienced investors, not beginners without a clear trading plan. Thank you for exploring binary options with us. We hope this information helps you make better decisions.

⚠️ Warning: Derivatives are high-risk instruments and may cause you to lose all your funds. Please study and understand the risks carefully before investing.