“Becoming a pro trader in 20 minutes is easy!” – “Generate 81% earnings in less than an hour.”

If you have ever visited websites dedicated to binary option trading, you have probably seen such advertisements inviting individual investors to open online trading accounts in order to take advantage of volatile financial markets. Do you want to becoming a pro trader ?

To earn money quickly, and with significant potential gains, more and more retail investors in France and the rest of Europe are taking an interest in speculative financial products such as binary options.

becoming a pro trader

But while some have been able to make a fortune very quickly and boast of their success on the Internet, many others have ended up losing most or all of their initial capital by betting on market developments through binary options.

By browsing the forums on the Internet, we quickly notice that not only do individuals, who often have no real experience in the financial markets, lose their money after the market has evolved against them but also that many of them never review their funds while the brokers with whom they have opened a trading account turn out to be unreliable institutions that are mostly located in offshore areas where domestic regulations do not apply to French individuals.

As retail investors become more sophisticated and demand innovative products that allow them to operate in the financial markets with low apparent costs, the question then arises: are binary options financial products worthy of treatment by serious investors or are they ultra-speculative products designed more for fans of online gambling sites?

How do the binary options work?
If binary options are a product known to almost all retail traders, it is explained by its very simple nature which makes them more accessible to neophytes.

When you buy a binary option, whether it is a call (call option) or a put (put option), you make a bet on the evolution of the underlying in a given time interval and with a potential gain known before the transaction. The underlying can be any financial asset, and most of the time online brokers offer binary options on Forex, commodities, stock market indices and even individual stocks valued by markets like Apple or Facebook.

Example of a call operation on the EUR/USD parity

Let’s say that at 9am, when the stock markets open in Europe, the EUR/USD pair is quoted at 1.3100. In 55 minutes, a macroeconomic publication in Germany, the ZEW Investor Sentiment Survey, will emerge and you think that this event will lead to a rise in the EUR/USD in the minutes following the announcement. You then estimate that at 10:00 am, 5 minutes after the publication of the ZEW index, the EUR/USD price will be above 1.3100.

With your trading account at the binary options broker XYZ Options, you buy a call at 9am with a maturity at 10am on the same day and an exercise price at 1.3100. The transaction costs you 100 euros, which is the standard amount for binary options brokers. If at the expiration of the option, the EUR/USD rate is higher than 1.3100, you will recover your 100 euro bet and earn 71 euros, i.e. a performance of 71% of your bet. If, on the other hand, the EUR/USD rate is below 1.3100 at 10am, you will only get back 15 euros of your initial bet, i.e. a loss of 85%.

Transactions via binary options are therefore very simple because, unlike vanilla options, the price of the underlying must not exceed a certain threshold upon exercise for the transaction to be profitable. It is only necessary that the price of the underlying has risen at the end of the binary option for the call to be profitable and vice versa for the put.

Let us now take again our example of a call purchase on the EUR/USD parity. Let’s say this time you trade 1000 trades on your trading account with the binary option broker. Once again, each contract costs you 100 euros, and when the market evolves in your favour at the end of each contract, you recover your initial bet and earn 71 euros. If the market has not evolved in your favour by the due date, you only get back 15 euros of the 100 euros bet.

Let’s say that after 1000 trades, 545 are winners and 455 are losers. With the 545 winning trades, you make a profit of 38,695 euros. With the 455 losing trades, you receive a loss of 38,675 euros. Out of the thousand operations performed, you only make a profit of 15 euros, slightly above breakeven. In other words, you have to save more than 54.5% of the time to make a profit.

Our example therefore shows that the binary options trader must earn more than once in two to make profits, as long as the profit rate of a successful transaction is below 100%. In addition to this, binary option brokers ensure that no hedging operation, i.e. the simultaneous purchase of a call and a put on the same underlying with the same maturity, is a “risk-free” operation.

Such a strategy will inevitably lose out as long as the gain rate is lower than the loss rate (in our example 71% and 85% respectively), and this is of course the rule and not the exception among binary option brokers.

Who are the Binary Options brokers?
If today the French private individual is bombarded by advertisements offering him binary options on Internet sites dedicated to trading, it is mainly because the market has experienced significant growth in recent years.

According to a study conducted in February 2012 by the Australian research firm Investment Trends, approximately 20,000 retail investors in France traded in Contracts for Difference (CFDs) and/or Forex, representing a 51% increase over the 12 months preceding the survey. As these operations are mainly of a speculative nature, binary option brokers have massively entered this strategic space established by CFD brokers a few years ago.

Due to the large influx of binary option brokers, this means of intervening on the financial markets has recently become fashionable, while private individuals who are new to betting and who are used to online betting sites are attracted by this “innovative” product.

Today, there are easily about fifty binary option brokers soliciting French residents, but very few have a physical presence on French territory. Like many Forex and CFD brokers who have wanted to benefit from more flexible regulations and more attractive taxation, the vast majority of binary option brokers have chosen to conduct their operations from offshore areas such as Cyprus, Mauritius, and the Virgin Islands.

While some institutions have chosen these areas to have a cost advantage over the more well-known brokers established in France, it becomes clear that others have very dishonest practices according to most comments left on the forums of stock exchange sites.

Traders who have been promised a welcome bonus of 3000 euros but who discover that they have to do a certain number of trades before benefiting from these offers or even worse traders who have never reviewed their funds when the broker has not responded to their withdrawal requests. These are unfortunately common practices in the industry, and individuals continue to fall into the trap despite the fact that the Autorité des Marchés regularly alerts the public to unauthorized websites offering binary option trading.

Towards regulation on binary options in France?

While the AMF and the Banque de France have never issued specific regulations concerning binary options, this may not be long in coming, whereas the MiFID Directive officially qualified them as financial instruments in 2007 and CySEC (Cyprus’ market authority) became the first regulatory authority in Europe to introduce regulation on this product in May 2012.

While CySEC initially hesitated to regulate binary options, it was finally forced to do so after the European Commission confirmed in DIrenecember 2011 that binary option brokers should be regulated under the MiFID Directive in their respective jurisdictions.

With this in mind, the authorities in France should normally establish a similar regulation when there are currently several brokers in France offering this product. But until this has been done, it is advisable to remain cautious with this simple product, which can significantly complicate any serious investment plan in the markets.

Adrien RAYMOND

 

Irene WOLK

Hallo, ich bin Irene Wolk. Früher habe ich Häuser gebaut, jetzt baue und betreue ich Websites, produziere Erklär-Videos und zeige dir in Videokursen, wie du deine Website auch selbst bauen kannst. Es fällt mir leicht, mein Wissen mit einfachen Worten und zugleich mit Spaß zu vermitteln und ich kann auch über mich selbst lachen, wenn mir dabei mal ein Fehler unterläuft. Mich begeistern Menschen, die sich wie ich die Freude am Lernen erhalten haben. Genau mit diesen Menschen möchte ich zusammen arbeiten.


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