Binary options involve placing a bet on whether a specific stock, commodity, index, currency or whatever will go up or down within a specific period of time (usually very short). If you guess right, you win. If you don’t, you lose. Think of it as the financial equivalent of betting red or black on each turn of a roulette wheel. The attraction is that you don’t need to invest a lot of money, it’s easy to understand and it can be done online from your home.
The disadvantage? Most people lose money (sometimes a lot) and some of the sites that promote this activity are scams. According to Wikipedia, the FBI estimates that these scam sites steal about US$10-billion a year worldwide from unsuspecting investors.
Here’s how Investopedia defines this financial instrument: “A binary option is a derivitive financial product with a fixed (or maximum) payout if the option expires in the money, or the trader losses the amount they invested in the option if the option expires out pif the money. The success of a binary option is thus based on a yes or no proposition, hence “binary”. Binary options have an expiry date and/or time. At the time of expiry, the price of the underlying asset must be on the correct side of the strike price (based on the trade taken) in order for the trader to make a profit.”
I wrote a column eight years ago on the topic, based on an e-mail I received from a professional online poker player who, ironically, was trying to convince his father to stop investing money in binary options. He wasn’t having much luck.
“The problem is he feels he is at a great advantage, citing his ability to read a bunch of charts, follow news, etc.,” the reader said. “He is a smart man, a former lawyer, and has been following stocks for years, but I feel that he may be overestimating himself here. I’ve looked into online binary options trading a bit and it seems to me that the consensus is that very few people outside of professional traders can beat the trading sites consistently for good money.”
I did my own research after receiving this note and came to the same conclusion. There is no way to accurately predict how any investment vehicle will perform in the next 30 minutes and you must win more than 50 per cent of the time just to break even. Add to that the addictiveness of this form of gambling (because that’s what it is) and it all equals financial ruin.
I bring this topic up now because of a bulletin issued last week by the Ombudsman for Banking Services and Investments (OBSI). It notes that while the sale of short-term binary options has been banned in Canada, investors can still buy them online through websites based in other jurisdictions. The message is: Don’t do it.
“Binary options are a very high-risk investment that Canadians should avoid,” the bulletin says. “At best, they are a high-risk investment strategy suitable only for sophisticated investors who are willing to lose their entire investment. At worst, the investments may be frauds designed to take advantage of unwary investors.”
OBSI notes that securities administrators have been working with credit-card companies, tech firms and advertisers to prevent the sale of binary options in Canada.
“However, because binary options are both a global and digital investment, a ban is challenging to enforce,” the bulletin said. “Canadians unaware of the volatile and often fraudulent nature of these products may continue to purchase them over the internet.”
OBSI goes on to warn that investors who disregard the warnings and then try to make claims for unwanted charges on their credit cards are out of luck.
“We have received multiple complaints from investors who used their credit card to purchase binary options. These investors later disputed credit-card charges related to these transactions. They believed that because they did not receive the promised services (such as the ability to withdraw their investment capital) that the issuing credit-card company should allow a chargeback or reversal of the charge.
“In the cases OBSI investigated, the chargeback was refused by the credit-card company. We found that the banks involved were not at fault for the failure of the chargeback request because they followed the normal chargeback policies and procedures. It was the policies of the payment card network operators that prevented the consumer from recovering any disputed charges. As a result, we could not recommend that the banks compensate the cardholders. We identified this as a systemic risk and reported it to the Financial Consumer Agency of Canada.”
The message couldn’t be clearer. Binary options were a bad investment when I wrote my original column eight years ago. They still are today.
Go to the OBSI website to read the bulletin: www.obsi.ca
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.