What Are Binary Options?

Binary options are a type of financial instrument that allows traders to speculate on the price movement of an asset within a fixed time frame. The term “binary” refers to the two possible outcomes of a trade—a trader either receives a predetermined payout or loses the entire investment. This all-or-nothing approach makes binary options different from traditional trading, where profits and losses are based on how much an asset moves in price.

Binary Options Are Considered High Risk

Example:

• Traditional stock trading: Trader A opens a $10,000 stock position buy purchasing 100 shares when the share price is at $100. The trader puts in a stop-loss at $90. If the share price drops to $90, the stop-loss will automatically activate and put the 100 shares on the market. If we assumed good liquidity, the shares will sell at or very close to $90. Therefore, the trader will get back around $9,000 and only lose circa $1,000. This type of traditional trading is not binary, as you can put your stop-loss at any price point, thereby regulating how much you stand to lose if the market turns against you.
• Binary options trading: Trader B risks $10,000 on a binary option where the underlying asset is company shares. The share price is $100 and the trader believes the price is about to to rise. The trader´s prediction turns out to be wrong, and the trader loses the full $10,000.

The short time-frames favoured by many retail traders, and encouraged by many binary option brokers, is boosting the risk even more, as it is notoriously more difficult to make correct price predictions over short time periods. Brokers that offer binary options

Important: Some Binary Options Are Actually Not Binary

Due to the popularity of the binary option, many brokers have developed a plethora of different binary options to suit different trader objectives and preferences. With some brokers, you will even find products in the binary options section that are, strictly speaking, no longer binary, since more than two outcomes are possible, and you may be able to lose less than 100% of the money you put at risk.

Why Have Some Financial Authorities Banned Brokers From Offering Binary Options to Retail Traders?

Around the world, many of the stricter financial authorities – such as the UK Financial Conduct Authority (FCA) and the Australian Securities & Investments Commission (ASIC) – have either banned brokers from selling binary options to retail traders (non-professional traders) or heavily restricted how binary options are allowed to be marketed and sold to this type of traders.

The reasons behind these bans and restrictions vary, but here are some examples of issues brought up by many financial authorities:

• Due to their binary nature, binary options are always high-risk and therefore unsuitable for inexperienced and non-professional traders. It is the responsibility of law makers to steer retail traders to more suitable investment types.
• Various studies show that a very high percentage (typically above 80%) of retail traders who try out binary options trading lose all the money they risk and never become profitable.
• Very short-term options are favoured by retail traders and encouraged by binary option brokers. Some brokers do not even offer longer-term binary options, or offer a much smaller variety of such options. Binary options with very short lifespans (e.g. 30 second binary options) create a situation that is more akin to gambling than investing. Allowing a broker to essentially operate a casino without a gambling license can be seen as unfair competition, and it also puts retail traders at in increased risk of developing a gambling addiction without even understanding that this is what´s happening. Traders believe they are analysing the market and making smart investments, but to the human brain, it activates that same pathways as slamming down your $$$ on red at the roulette table.
• A lot of scammers are using binary options to lure in potential victims, especially inexperienced hobby traders. According to some law makers and financial authorities, the sheer abundance of scammers in the binary options have created a siuation where the best course of action is to ban binary options outright (for retail trading) and try to steer non-professional traders and investors to other types of trading and investing.
• Binary options speculation is not useful to society and it can be banned without any major negative effects. While it is possible to risk and lose your money doing classic stock trading, the stock market provides a lot of positive effects, e.g. the ability for companies to raise money and the ability for individuals to become investors and save for retirement.

Is It Illegal For Me To Buy Binary Options?

Probably not, but it depends on the jurisdiction, so it is important for prospective traders to familiarize themselves with the applicable rules in their specific jurisdiction.

In most jurisdictions where binary options are banned or heavily restricted in the retail trading space, a retail trader who is carrying out binary options trading is not breaking the law. Instead, the rules typically target the brokers; they are the ones who are not permitted to market, offer and sell binary options to retail traders. The rules are in place to protect non-professional traders; not to cause legal trouble for them. If a retail trader is having issues with a binary options broker, and is based in a country where this type of consumer protection is in place, they can report the issue to the financial authority or the police without fear of reprisal. With that said, it can be difficult for the justice system to take action against the broker, since such brokers tend to be based abroad – typically in one of the countries known for not really getting involved in the foreign actions of online brokers.

It is also worth remembering that binary options bans and restriction are normally put in place specifically to protect hobby traders, also known as retail traders and non-professional traders. If you are classified as a professional trader, the rules will probably look different (depending on jurisdiction) and brokers will have more freedom when it comes to offering you binary options. For more information about how you can classify as a professional trader, contact the customer support of the broker you are interested in using.

Have the Binary Options Bans Made the Situation Worse for Retail Traders?

It could be argued, the even though well-intended, the binary options bans have had some negative side effects for retail traders – at least for retail traders who still want to engage in binary options trading.

Before, a retail trader interested in binary options trading could pick a well-known broker regulated by a strict financial authority. When the stricter authorities banned the sale of binary options to retail traders, it – of course – meant that the brokers based and regulated by these authorities stopped offering binary options to retail traders. Many of them are not even offering them abroad, since they do not want to risk their standing with a strict authority such as UK FCA or ASIC.

Therefore, it has become really difficult for retail traders to find trustworthy binary options brokers. The reputable high-quality brokers have been forced to step out of the arena, leaving more space to scammers and low-quality brokers. The brokers who are still offering binary options to retail traders are largely based in lax jurisdictions, making it difficult for retail traders to get any useful legal help if they run into an issue with their broker.

How Binary Options Work

As we have explained above, the classic binary option is built like this: You make a prediction about an underlying asset, e.g. a stock price or a currency exchange rate. Your broker is also your counterpart in the deal. If your prediction turns out to be correct, you get a predetermined amount of money, e.g. 80% of the money you put at risk. If your prediction turns out to be wrong, you lose 100% of the money you put at risk.

Step-by-step Guide For High-Low Binary Options Trading

This is how it works with many brokers and types of classic (High-Low) binary options. Still, these are not standardized contracts, so differences do occur, and it is very important for a trader to check the terms and conditions directly with the broker.

1. Choose the Underlying Asset – Binary options can be based on a wide range of different things, such as stock prices, forex pairs, cryptocurrency exchange rates, commodity prices, indices, and more.
2. Make a Prediction – Do you believe the asset’s price will be higher or lower than its current level at the time of expiration (i.e. when the lifetime of the binary options is over)? Binary options make it easy to speculate on both rising and falling prices, without having to involve oneself in short-selling, and this is one of the appeals of binary options.
3. Select the Expiry Time – This can range from less than one minute to several hours or even days, depending on the broker. Some brokers even offer binary options that run for weeks or months, but this is more unusual. Being able to select and know in advance for how long the position will be open is appealing to many traders, and is one of the reasons why binary options are popular.
4. Set the Trade Amount – Traders decide how much they want to invest in the trade. You do not have to worry about lot sizes, etc. Binary options are accessible even to traders with very small bankrolls, and this has helped promote their popularity among small-scale hobby traders.
5. Wait for the Outcome – When the expiry time is reached, the trade either closes in profit (in the money), or the investment is lost (out of the money).

Types of Binary Options

The popularity of the classic binary options – also known as the High/Low Binary Options – promoted brokers to create a wide range of other binary options. Traders must always study the terms and conditions carefully in advance to avoid unpleasant surprises.

The classic binary options, also known as the High/Low Binary option, is a binary options where the trader predicts whether the asset price will be higher (call option) or lower (put option) than the current price at expiration. This type of binary option is also marketed as Hi/Lo option and Call/Put option.

Below, we will take a look at a few other binary option type:

One-Touch Binary Options

With this type of binary option, the underlying asset must reach a certain predetermined price level at least once before expiration. If it does, the trader gets paid; if not, the investment is lost. This type of binary option exists for both upwards and downwards price movements.

No-Touch Binary Options

This is the opposite of the one-touch option. The trader will only get paid if the underlying asset price never reaches a certain predetermined price level during the lifetime of the option. Just like the one-touch option, no-touch options exist for both upwards and downwards price movements.

Range (Boundary) Binary Options

Here, the trader predicts whether an asset’s price will stay within a defined range or break out of it before expiration.

Ladder Options

This works similarly to the high/low option but offers multiple price levels with different payout rates. Traders can bet on how far an asset will move rather than just choosing up or down. Since there are several possible payout rates, it is – strictly speaking – not a binary option, because the outcome is not binary.

You can learn more about different types of binary options by visiting binaryoptions.net.

Payouts and Risks

Binary options offer fixed payouts, typically ranging between 70% and 95%. If a trader invests $100 in a trade with a 90% payout and get their prediction right, they receive $190 ($100 initial stake + $90 profit). However, if they lose, they forfeit the entire $100.

This means that when the broker wins the trade, the broker gets the full amount. When the trader wins the trade, the trader never gets the full amount – only a percentage. In the example above, the broker will get $100 from the trader if the trader is incorrect in their prediction, but the trader will only get $90 from the broker if the trader is correct in their prediction.

This dynamic makes risk management essential, and also very difficult, since the odds are not in the trader´s favour. Multiple losing trades can quickly deplete a trading account, and – ceteris paribus – a winning trade will not fully compensate for a losing one. In the example above, the trader will lose $100 on each losing trade, but only gain $90 from each winning trade.

The binary nature of the binary option further complicates risk-management, as it is not possible to use stop-loss orders. With traditional trading, traders can minimize losses using stop-loss orders, but binary options have no way to exit a trade early unless the broker provides an “early close” feature, or the trader is skilled enough to employ hedging strategies.

Binary Options vs. Traditional Trading

• Fixed Risk & Reward: With binary options, traders know exactly how much they stand to lose or gain before entering a trade. Traditional trading, however, allows flexible profits or losses based on price movements. With traditional trading, you know the maximum amount of loss possible (the risked capital) but losing less than this is also possible, as is breaking even, or profiting any amount of money.
• Speed: Binary options are typically sold with very short lifetimes, allowing traders to see quick results, whereas traditional trades can be held for days, weeks, or even years. Of course, traditional trading also include day trading, so speed is not exclusive to binary options. A trader interested in quick traditional trading can for instance involve themselves in scalping; a very fast day trading technique.
• No Ownership: Unlike classic stocks or forex trading, binary options traders do not own the underlying asset—they simply bet on price direction. This is not unique to binary options; it is a feature of all types of speculation using derivatives.
• High Risk: Since binary options have an all-or-nothing outcome, they are riskier than traditional trading where partial losses are possible and better risk-management routines can be employed.
• Counterpart: With traditional trading, it is possible to pick a broker that is only a broker and not your counterpart in the trades. With binary options, your broker is always you counterpart in the trade, and this automatically creates a conflict of interest.
• Regulation: For a retail trader, is easy to find a reputable online broker regulated by a strict financial authority that enforces strong trader protection rules. For binary options, this is much more difficult, as strict financial authorities tend to ban brokers from offering binary options to retail traders.

Why Did Binary Options Become So Popular Among Retail Traders?

While binary options come with high risk, they also offer things such as simplicity, fixed payouts, and fast results, making them appealing to certain traders – including a lot of inexperienced retail traders. Below, we will look at a few points that can help explain why binary options have became so popular among online retail traders in the 21st century.

Simplicity Over Complexity

Binary options trading is straightforward, making it ideal for traders who don’t want to deal with complicated strategies and risk-management routines. Unlike traditional trading, where profits and losses gradually move on a sliding scale depending on how much an asset moves, binary options have a fixed outcome—the trader either profits a set amount or lose their entire investment. This makes it easier for beginners to understand and execute trades. Since the binary option has a fixed expiry time, a trader does not have to think about managing stop losses or adjusting take-profit levels— a trade either wins or loses based on the prediction.

Emphasis on short-term trading

Traditional trading can also be very short term (e.g. scalping strategies), but binary options brokers have been exceptionally successful when it comes to really marketing the short-term aspects of binary options trading to novice traders.

Elements that a more experienced trader often see as downsides and challenges, a novice trader or someone who is just trading “for fun” might see as desirable – including strong emotions, the feelings surrounding high-risk decisions, the all-or-nothing outcomes, and the fast-paced nature of short-term binary options trading. In may ways, short-term binary options trading can feel similar to a casino experience, but with the additional boost of feeling like a smart and skilled market analyser rather than a lucky craps guy when a big win rolls in.

For traders who enjoy fast-paced trading, binary options are very appealing, as expiry times can be as short as 30 seconds or even less. Binary options attractive to those who want instant feedback on their trade choices, rather than waiting hours, days or weeks for a position to play out.

Just like traditional types of day trading, short-term binary options are also appealing to traders who do not want to leave a trading session with positions open. With short term trading – either traditional or with binary options – you can close all your positions before you leave the trading screen and sleep soundly at night, not having any longer-term open positions to worry about.

Fixed Risk and Reward

As mentioned above, classic binary options comes with a pre-determined payout, and if the option closes out of the money, the trader loses 100% of the risked amount. For many novice traders, this is appealing, as a creates a type of certainty regarding the outcome. There are only two possible outcomes and the trader is aware of them ahead of the trade. Before placing a trade, they know exactly how much they can win or lose. This removes the uncertainty of slippage (when stop-loss and take-profit order can not be executed in time due to a lack of liquidity). Binary options have turned out to be appealing to traders that like this clear and well-defined risk and reward.

Low Entrance Requirements

Binary options brokers have been very good at emphasising how easy it is to get started with binary options on a shoe-string budget. With that said, it is also possible to find plenty of traditional brokers online today where you can get started with a $10 deposit and trade nano-lots. Still, binary options brokers have been very good at getting their message across and reaching individuals who believe that they do not have enough capital to get started with traditional trading.

Low first-deposit requirements have also helped reduce resistance for unregulated binary options brokers and brokers regulated in lax jurisdictions. Many traders feel that when they only need to deposit $10, they are okay with taking a risk with a possibly sketchy broker and see how it plays out. Still, traders are advised to stay on their toes, since sharing personal data with sketchy brokers (and outright scammers posing as brokers) increases the risk of identity theft, and a trader can end up running into considerably more trouble than simply losing ten bucks.

Big Bonuses

Many binary options brokers are marketing their products with huge welcome bonuses and other gimmicks. Traditional brokers offering traditional trading have largely moved away form this – at least if they are regulated by strict financial authorities, because these authorities have largely banned gimmicky marketing campaigns targeting retail traders. This has created a dynamic where the traditional brokers have less to offer when it comes to gimmicky marketing campaigns, and the binary options brokers seem more appealing to many novice traders – as the welcome them with big welcome bonuses and a host of other attention grabbing tactics.

Hedging

Some traders use binary options as a part of a hedging strategy. For example, if you have a forex trade open, you can place a binary option trade in the opposite direction to reduce potential losses. If your main trade moves against you, the binary option trade may offset some of the loss. This strategy allows traders to balance their risk exposure in a straight-forward way.

When to use binary options to make money

Shot binary options is an excellent tool to use to ride a strong trend in the market. If you use super short binary options you will be able to turn your money over at a very high rate and you can make a lot of trades every hour. If you use 15 second options than it is often possible to make at least 10 trades a minuted, 600 trades an hour. Some of these will mature outside the money. A trend is never 100% in on direction but a large percentage of the trades will mature in the money and earn you a large total profit. This is especially true if you increase your investments as the trend continues.

It is very important that you stop trading before the trend dies. Do not try to milk every cent out of it. You risk getting caught when the trends turn which can result in large losses during the last few minutes of your trading session. This is especially true if you have increased the amount of money that you invest in each option during the trend.

Try to predict how long you think the trend will last and then stick to that assumption. Do not get tempted into believing that the trend is stronger then you first though and will last longer. At least not without taking your time to reanalyze the market in detail. You should  not be afraid to stop trading early if the trend seems to be loosing strength sooner than you thought.

Never be afraid to cash in and decide that you have earned enough on a particular trading session. You might leave money on the table but any trading session that you leave with a profit is a good session. Greed has been the downfall of more than one trader.

One method among many

We are not suggesting that you will be able to make a living using this trading method. It is not meant to be a way to make a living. It is supposed to be one tool in the tool belt of an accomplished trader. There can sometimes be months between strong trends that are suitable to be traded in this way. If you try to do it in between those trends you might end up loosing large amounts of money. This is not a method for making money, it is a method that lets you take full advantage of strong trends when they do appear.

Using a trading robot

It is possible to super charge this trading method by using a trading robot. A trading robot will make it possible to buy a super-short option every second provided that you have an internet connection that is fast enough. This allows you to make a lot more trades and potentially earn a lot more money while you are trading a trend. Instead of 600 trades an hour you might be able to make 3600 trades an hour. This will give you a lot higher profit provided that the success rates remain the same (they usually will).

Should I use a trading robot? If you need to ask that question then the answer is no. A trading robot let you do a lot more transactions each minute but they also dramatically increases your risk while trading. If you are not familiar with robots than I recommend against using them in this way. If you want to start using them then it is better to start using them for trading with a lower frequency. Once you feel more comfortable with the robots and understand how they work you can make your own choice of whether to use them in this way or not.

How to choose a broker

Finding a Good Binary Options Broker

Since the strict financial authorities tend to ban brokers from offering binary options to retail clients, retail clients are finding it increasingly difficult to find trustworthy binary options brokers. When it is no longer possible to rely on the protection of a strict financial authority, traders have to either abstain from binary options or carry out their own due diligence as a much higher level than for traditional brokers.

The binary options field is rife with sketchy brokers that engage in price manipulation or make it exceedingly difficult to withdraw money. There are also outright scammers that does´t even bother to offer any real trading platform; they simply pose as brokers and collect first-deposits and personal data.

As you can see, it is imperative from traders to either stay away from binary options or go with a broker that has a long and verifiable track-record of impeccable conduct within the trading community. As always, the prospective trader must also assess other factors to find out if the broker is a suitable match for them and their trading style, e.g. the selection of underlying assets, the payout levels, and the costs involved with trading, using the platform, and making deposits and withdrawal.

Below, we will go through a few points that are good to keep in mind when evaluating a broker, and most of them are useful even if you decide to stay away from binary options and go with traditional trading.

Regulation and the Broker’s Reputation

A broker’s reputation can provide valuable insights into their reliability, customer service, and payout consistency. Online trading forums, review sites, and social media platforms often contain real trader feedback about withdrawal processes, platform performance, and overall trustworthiness. Be cautious of brokers with many complaints about withdrawal delays, sudden account restrictions, or misleading bonus terms. Also be aware of the risk of fraudulent reviews posted on behalf of the broker.

If a broker claims to be regulated by a financial authority, investigate if that is actually the case, and if any license is still active. Also investigate the seriousness of the financial authority and their track record of actually upholding the rules, supervising brokers, and protecting trader rights. Some financial authorities have great regulations on the books, but fail to actually hold brokers accountable.

Different regulators provide varying levels of trader protection. Some governmental authorities will even offer compensation schemes in case of broker insolvency, but if you are eligible or not can depend on your geographical location (some governments only compensate traders located within their realm). Knowing what protections you have can help you make better informed decision when selecting a broker.

Your Trading Style

It is important to assess if a broker is suitable for your trading style and financial goals. Before selecting a broker, it is therefore essential to define your trading objectives and write down a trading strategy, including risk-management routines.

Are you looking to trade for short-term profits, or are you planning to use binary options as part of a broader investment strategy? Do you want to focus on high-frequency trading, or do you prefer longer expiry times? Identifying your goals, strategy and risk-management style will help you choose a broker that offers suitable trade durations, asset selections, payout structures, and tools. Different brokers provide different trading tools, and the ones you need will depend on your strategy. If you rely on technical analysis, look for a broker that offers advanced charting tools, trend indicators, and drawing tools. If you prefer copy trading, there are brokers that allow you to follow and replicate the trades of experienced traders. For those who want to automate their trading, a broker that supports auto-trading or API integration will be beneficial.

Some brokers offer additional risk management features, such as early exit options, rollover features, or loss protection tools, which can be included in a risk-management strategy.

Range of Tradable Assets

Binary options trading is available on a variety of assets, including forex pairs, stocks, commodities, and indices. Some brokers even offer cryptocurrency binary options, allowing traders to speculate on Bitcoin, Ether (Ethereum), and other digital coins. A broker with a wide selection of assets provides more opportunities to diversify your trades and take advantage of different market conditions.

Trading Platform

Binary options brokers typically use proprietary platforms instead of any of the big independent third-party trading platforms, so testing the platform through a demo account becomes especially important to ensure the platform works well and fits your needs.

A demo account allows traders to practice binary options trading without risking real money. This feature is especially valuable for beginners who need to not only explore the platform, but also understand how binary options work, how payouts are structured, and how to manage risk.

Consider it a red flag if the broker offer no demo account, if the demo account is not free, or if you have to make a first deposit before getting access to the demo account. Also be vigilant if a broker demand you verify your identity and residency before getting access to a demo account. A demo account is only for play-money trading, so verifying your identity (to prevent fraud, money laundering, etc) should not be required.

Payout Structure and Profitability

One of the key elements of binary options trading is the fixed payout system. However, payout rates can vary significantly between brokers and binary option types, typically ranging from 70% to 95% per winning trade. A broker offering higher payouts on your preferred assets can improve your profitability over time, unless this offer comes with other downsides. Before committing, compare payout percentages and conditions across different brokers, and check for any conditions or restrictions that may apply.

Some binary option brokers offer rebates on losing trades, which can help reduce overall risk. It also makes a bit more complicated to evaluate the risk/reward structure. Make sure you fully understand the rebate terms and conditions before you make a decision. Some offers look better at first glance.

Minimum Deposit

Binary options brokers have different minimum deposit requirements, ranging from just a few dollars to $250 or more. A broker with a low minimum deposit allows you to start trading without risking too much capital.

Minium Trade Sizes

Check the minimum trade sizes. Some brokers allow very small trades, while others require $10 or even more per trade. Choosing a broker with low minium trade size gives a trader more flexibility and is beneficial for risk management. A trader should not only be able to open a position – he or she should be able to open a position without risking a big chunk of their total trading capital on a single trade. Allocating a lot of the total trading capital on a single trade is unadvisable from a risk-management perspective. If the market goes against the trader, it will be difficult for the trader to recuperate, and a few losing trades in a row will completely wipe out the trading balance.

Customer Support

A responsive, skilled and helpful support team is essential, e.g. when dealing with deposits, withdrawals, or technical issues.

• Look for brokers that offer 24/7 support, particularly if you trade binary options outside normal office hours.
• Multiple contact options such as live chat, email, and phone support are ideal. Make sure you can reach the support without logging in to the platform. If not, what will you do if you encounter issues with logging in?
• If only email support is available, you will not be able to get step-by-step guidance in real time, e.g. if you encounter problems going through the withdrawal request process for the first time.
• Before opening an account, test the broker’s customer service by asking a few questions about withdrawals, platform features, or regulatory status. If responses are slow, vague, or unhelpful, this could indicate poor service. A good broker should have a knowledgeable support team that resolves issues quickly and efficiently. Regrettably, low-quality support robots (artificial-intelligence generated answers) have become quite common among brokers that are tying to cut costs, and it can be difficult to access a real human if the robot fails to help with an issue.
• If telephone support is important to you, are you okay with having to make a potentially costly phone call abroad each time you want help? If not, pick a broker that come with a local phone number, toll-free calls, call-back service, online phone support, or similar.

Withdrawal and Deposits

Ensure that the accepted deposit and withdrawal methods include at least one of your preferred transaction methods. Also make sure you know what it would cost you to use this method for deposits and withdrawals, including both method fees (paid to the transaction company) and any broker fees (for processing your deposit/withdrawal).

A common complaint among binary options traders is withdrawal delays and hidden withdrawal processing fees. Before depositing funds, check the broker’s withdrawal processing time, transaction fees, and account verification requirements. Some brokers impose strict withdrawal conditions, especially if you have accepted bonus money , making it difficult to access not only the bonus money but also your deposited money and any profits. Some brokers impose volume requirements once you have received a bonus, meaning you must trade a certain amount before withdrawing any funds (including deposits and profits).

Terms of Service

Carefully reviewing a broker’s terms and conditions can prevent unpleasant surprises. Pay special attention to bonus terms, trading restrictions, withdrawals, asset price information, fees, and account inactivity policies. If anything in the terms seems unclear, contact customer support for clarification.

 

This article was last updated on: February 25, 2025