So you’ve heard about binary options. Your dad or your neighbor told you a story about a guy their friend at work knows who made a whole bunch of money trading binary options on FB stock with a broker registered in Cyprus. Now you’ve just got to get in on the action.
Over the past few weeks you’ve seen stocks like those of Amazon.com Inc. (NASDAQ: AMZN) and Facebook, Inc. (NASDAQ: FB) rip higher and lower on earnings news and just know there must be a way to make money, you know, without actually buying the stocks.
The good news is: there totally is a way to make big money off of the moves like FB and other NASDAQ shares have made over the past weeks. The bad news is: it entails risk and it isn’t with binary options.
Binary FB Options and CBOE FB Options: A World Of Difference
Up until about 2005, no one had heard of binary options. There were options on NASDAQ stocks traded on the Chicago Board Options Exchange (CBOE) and other options exchanges, but that was about it. When FB shares were first listed in 2012, corresponding FB option contracts began trading on the CBOE.
These exchange-traded FB options are contracts between two parties, known as counter-parties, defined as follows: options give the holder the right to buy or sell a set quantity of some asset at a predetermined price (the strike price) for a predetermined length of time. FB option contracts that give the right to buy are called call options. Those that give the right to sell are known as puts.
Recent FB Volatility Presents Trading Opportunities
With today’s volatility in FB shares, there was a great deal of activity in the corresponding FB option market. Let’s take a look at some FB calls and puts on the CBOE and look at what kind of money could have been made, and lost, and then compare with binary options.
We’ll look at the FB July 31, $99.50 put option. This gives the holder the right to sell 100 FB shares at $99.50 until expiration tomorrow afternoon.
Yesterday this contract closed at $5.50. Today it traded as high as $6.55: a gain of 19 percent. A quoted option price of $5.50 equates to $550 because there are 100 shares in most contracts. Plus, the current bid is $4.35, meaning that holders could liquidate their positions with a 21 percent loss. Most binary FB options do not allow this luxury.
What about traders who bought call options, or the right to buy, and got the trade wrong? The corresponding FB $99.50 call option that expires tomorrow is trading down $2.82 with a bid of $0.03: pretty much a 100 percent loss.
Losses like this are common with all options: investors who can’t afford to take 100 percent losses from time to time should not trade them. A very limited portion of any portfolio should be allocated to options.
FB options traded on the CBOE allow traders to buy or sell their contracts at any time the market is open in an open and transparent market. Further, in some cases, holders of call options on stocks like FB, AMZN, or those of Google, Inc. (NASDAQ: GOOG, GOOGL) have earned many thousands of times their initial investment.
FB and other options are zero-sum games. For every winner, there is an equal loser: options are for knowledgeable investors only.
Binary FB Options: Roulette May Give Better Odds
Binary FB options aren’t traded on regulated and transparent exchanges like the CBOE. They are private contracts between individuals and foreign corporations. That is worth repeating, they are contracts made with foreign corporations: good luck receiving support from the judicial system, law enforcement, the SEC, FINRA or anyone else if you get ripped-off.
A binary FB option doesn’t give the holder the right to buy or sell anything. Binary FB calls are bets that FB stock will go up over the next 20 minutes and binary FB puts are bets that the stock will go down.
Most binary options “brokers” (counter-party would be a more apt description) pay 85 percent when customers are right. Customers lose 100 percent when wrong.
For the most part, a customer who bought a FB binary option can’t get out of a trade, even with a loss, before the agreed upon expiration. FB stock has to be lower or higher at the precise moment of expiration. Some binary option brokers who offer FB allow customers to opt for a buyout, giving them the right to exit trades early. The most common scheme sees profits reduced by corresponding buyout amounts. This means that if a customer chooses to have a buyout of 20 percent available, they would only earn 65 percent when correct.
Betting on red in European roulette gives a 1:1 payout and has a 48.6 percent chance of winning. Betting on FB stock to rise in the next 20 minutes with the average binary option broker has a 1:0.85 payout and has a 50.0 percent chance of winning: you be the judge. Is it worth giving up 15 percent of payout for a random event that only occurs 1.4 percent more often?
Lastly, those multi-thousand percent returns that are at least possible, if not uncommon, with exchange-traded options? There is absolutely no way to earn similar returns in the binary option game. With profits limited to 85 percent or thereabouts, binary brokers are pocketing the sweetest part of the option deal for the contract-holder.
Commissions On FB Options: CBOE Versus Binary
To buy and sell FB options on the CBOE, investors will need an account with a member firm and to pay commissions on trades. In 2015, $5 for an online option trade would probably be seen as expensive. Exchange-traded option commissions are very affordable.
Binary FB option brokers don’t charge commissions on each trade. Where they get customers is if they attempt to withdrawal profits, which despite terrible odds, may occur from time to time. Binary option brokers charge commissions when customers withdrawal profits. The amount charged varies greatly by broker and the individual situation.
In short, you’re going to be charged an unknown, sliding amount, arbitrarily imposed by a foreign corporation if you ever manage to profit against the terrible odds given.
In closing, to answer, “Are binary options on NASDAQ stocks like FB good investments?” The answer is that roulette probably offers investors better and more stable returns.
[Photo by Scott Olson / Getty Images]