By Darrell Martin
Binary options continue to gain in popularity around the globe. As this happens, people are quick to give opinions without knowing the facts. They may have read an article or a forum thread, had a bad experience, made mistakes and did not know it, or are flat out just making stuff up.
As absurd as it sounds, some sites actually try to market their product by posting inaccurate content. This leads to confusion.
To help eliminate this confusion, here are five common misconceptions, followed by the facts to help you be more informed about the world of binary options.
1. Binary Options Are Not ‘Really’ Regulated
Fact: Although many binary “bucket shops” (fraudulent brokerages) do not have regulation, there are several types of regulation or registration. What is the difference between being registered or regulated?
Registration is being signed up with an organization such as the Better Business Bureau. It has no power to enforce penalties, seize assets or prosecute. It has no real power to protect you, the consumer beyond a bulletin board of warnings.
Regulation means there is a regulator with the power to impose and enforce fines and punishments for violations of regulations, in order to protect the trading members. The CFTC is the Commodity Futures Trading Commission. It oversees the CME/Nymex/Comex and Nadex. The CFTC clearly states that Nadex is a regulated, designated contract market for offering binary options.
2. Binaries Are Always A Yes/No, Up/Down Trade
Fact: As of expiration, binaries are a Yes/No or True/False proposition --stating that an underlying market must be above or below a strike by expiration. However, this is not the case with all binaries. On Nadex, with every single contract, you can enter and exit before expiration. Therefore, as the price rises or falls, you can enter and exit the trade. One of the biggest facts separating trading from gambling, is the ability to exit a position before expiration. In addition, on Nadex, you can buy and sell binaries at different strikes, creating premium collection, range bound and other strategies.
3. You Have To Hold Until Expiration
Fact: As stated above, Nadex binaries do not have to be held until expiration. Even though all contracts on Nadex have capped risk, you do not have to take the maximum risk. You can exit early to limit loss or lock in profits.
4. Binary Pricing Is Randomly Made Up Fact: Binary pricing can be manipulated over-the-counter, where payouts are skewed. However, binary options on an exchange such as Nadex are based on a Black Scholes model. A slightly easier to understand explanation, is that pricing is a reflection of a delta of a call option with the same strike and same expiration and time. If the price is manipulated and off by too much, arbitrage will be available and quickly bring it back into line like on any other market.
5. Liquidity Is Low Fact: A true exchange does not take the other side of your trade. Pricing is transparent with liquidity immediately visible for the best price three levels deep. Contracts may have 10 or 900 available with the number consistent for the specific market and the time of day.
Liquidity impacts any market. Looking at the futures market, Corn futures have less liquidity than the S&P 500 E-mini Futures. You can expect the same on Corn binaries versus S&P 500 future binaries when trading on Nadex. Be aware that certain times of day or night will also have more trader demand. In addition, the type of market will determine the liquidity and the bid/ask spread. However, the liquidity is known upfront when you enter and it remains consistent.
Remember, when trading binaries on Nadex, liquidity is sufficient to meet the trader’s needs. Even if all contracts are taken out, then more liquidity will be added back in, due to market makers contractual obligations to make markets.