Is Binary Options Gambling?

A quick online search could lead you to the conclusion that “yes, trading binary options is gambling”. However, if you spend time understanding how binary options work, including their merits and drawbacks, you will find that the answer is not that clear-cut.

In this article, we examine whether binary options is gambling by analyzing what binaries are, then comparing the all-or-nothing style of investing to betting, and finally by discussing the rules and regulations surrounding binary options. We also talk about the role strategy plays in becoming a successful trader, and share tips for safely engaging in binary options to avoid gambling behavior.

Binary Options 101

To understand the binary options gambling debate, you first need to know binaries work…

Binary options are a type of derivative that involves betting on the price movement of an asset in the often near future for a fixed amount. As the word ‘binary’ suggests, there are typically two outcomes – the trader is correct and wins a fixed payout, or the trader is wrong and they lose their initial bet.

There are several key components in a binary options contract:

• The underlying market: Binary options are available on almost any asset or market, including stock prices (Meta/Facebook, Pfizer etc), indices (S&P 500, NASDAQ 100 etc), commodities (gold, silver, crude oil etc), foreign exchange (EUR/USD, GBP/USD, etc), and cryptocurrency (Bitcoin, Ethereum etc).
• The strike price: The strike price is the supposed market price of a security at which it is bought or sold.

• By taking into account the strike price, a trader may choose either a call option, expecting the value of the underlying asset to be above the strike price when the contract expires, or a put option, expecting the value of the underlying asset to be below the strike price when the contract expires.
• The expiration date and time: Binary options gambling contracts have different durations, including short-term expiries that range from 30 seconds to 300 seconds, medium-term expiries that range from 5 minutes to a couple of hours, and long-term expiries that range from a few days to weeks and months.
• Payout: This is the amount a binary options trader stands to make from a correct prediction. Often, brokers will offer payouts of between 70% and 95% on popular assets. So if you staked $1000 on a prediction with a 90% payout, and you were correct, you would receive $1,900 ($1000 bet + $900 profit).

Example Trade

A simple example can make it easier to understand how binary options gambling vs trading works. Suppose an underlying stock is priced at $82 at 9:00 am, you expect it to rise to $85 at 9:15 am, and have $100 as initial capital to bet. The available contract offers you an 85% return with an expiration time of 9:15 am and based on your expectation, you naturally choose a call option.

In the first scenario, the price of the stock reaches $86 at the end of the duration, which means you win $185, and make a net profit of $85.

In the second scenario, the stock price lowers to $78 by 9:15 am, meaning that you lose the $100 you bet on the option.

This standard type of binary option is called a High/Low trade; however there are other contracts you might consider as a day trader.

In the In/Out binary option, traders make their predictions over expected price ranges. Traders choose in if they expect the price to stay in a predetermined range at the time the contract expires, or they choose out if they believe otherwise.

In the Touch/No Touch option, traders predict whether the price of an option will touch or won’t touch a certain value at any point in time before the expiry.

If you are trying to understand whether trading in binary options is profitable in the long run, you should also take into account:

1. The win or success rate, which is the number of times on average your trades are successful out of a total of 100 trades for a given payout, and;
2. The breakeven ratio, which is the percentage of the correct predictions needed in the long run so that you will neither earn nor lose any money.

For instance, if the payout offered by the broker is 85% as in the example above, you need to have a correct prediction rate of 54.1% to break even. In binary options, the win rate needed to break even decreases as the payouts increase; however, in any case, the odds in binary options favor brokers, as even with higher payouts of 95%, the success rate needed for breaking even is over 50 percent. As a result, many commentators believe binary options are gambling. But is it that simple?

Binary Options Trading Vs Gambling

Both in binary options and gambling, only two outcomes are possible: you either win or lose.

Many people view binary options as a game of chance due to its similarity to gambling. Additionally, binary options may seem straightforward at first glance, leading to the misconception that trading binaries requires no more skill than rolling dice, flipping coins, or using slot machines.

However, upon reflection, several differences emerge between binary options trading and gambling:

Random vs. Non-Random Outcomes

Many argue that binary options are gambling because the odds are stacked against the trader/player. However, this argument overlooks a crucial difference: in casino games like online blackjack, outcomes are independent of external factors, while in binary trading, outcomes are heavily influenced by real-time events. Thus, while gamblers face truly unfavorable odds, traders can improve their chances by following and interpreting current market events affecting stocks, forex, or cryptocurrencies.

Intuition vs. Learned Skills & Personality Traits

Some believe that in gambling and binary options alike, players and traders rely solely on intuition, ignoring the role of knowledge, skills, research, analysis, and strategy in achieving positive outcomes.

However, to view binary options as an art that involves making repeated short-term investments based on an optimal buy/sell strategy or system that balances expected risks and returns is a more accurate representation.

This reduces the risk of binary options gambling.

To become a successful binary options trader, it’s essential to develop personality traits such as focus, discipline, and rational decision-making. Additionally, it’s crucial to excel in risk mitigation methods, possess strong numerical skills, conduct detailed research, identify opportunities, find investing styles that suit your traits, interpret news, and constantly learn.

If you meet these criteria, binary options trading is not gambling but a well-considered and researched investment.

Risk

The high-risk nature of binary options is often cited as a reason to classify it as gambling. However, categorizing every activity associated with risk as gambling would classify all types of retail investing in financial markets as gambling.

Some argue that the short duration of trades in binary options, forex, or derivatives like spread betting make them closer to gambling than investing. They claim that short expiries like the popular 60 seconds make it impossible to make a calculated risk decision.

However, binary options are available with different expiries, including longer contract lengths, which still offer ample opportunities for profit.

Secondly, different strategies are available for binary options contracts with various expiries, which allow a trader to take a calculated course of action.This can help reduce the risk of binary options gambling.

A short list of a couple of popular strategies might give you an idea about how it is possible to lower the risk of losses and pump up winnings:

• Rainbow Strategy: A rainbow strategy is based on multiple moving averages and the name rainbow comes from colors associated with each moving average.In binary options, traders usually use three moving averages since moving averages with shorter periods react to price changes more quickly.
• Candlestick Strategy: Candlestick charts help traders understand the open, close, high, and low prices of an asset over a given time.The trader, of course, has to spend some time to understand how to observe the patterns, and how to improve prediction skills by combining the information gathered from the graph with one’s own knowledge and experience.

Rules, Regulations & Brokers

An important part of the binary options gambling debate is also the regulator’s view point.

The history of any financial instrument more or less follows the same trend.Nearly all new financial tools, in the beginning, operate in an environment of the ‘wild west’, where effective regulations are not in place, the chances of coming across scam brokers are high, and many people flock into the market after learning that making large amounts of money in a short time is possible.

However, as time passes, the market for a particular instrument becomes more effectively regulated, dubious brokers are identified and removed, and traders become increasingly sophisticated.

Binary options were initially introduced as a tradable asset on the Chicago Board of Exchange (CBOE) in 2008. In 2012, the Cyprus Securities & Exchange Commission (CySEC) classified binary options as tradable assets for the first time, and as this derivative became more popular, many countries and institutions developed their own sets of regulations.

Currently, binary options trading is legal in many countries and is not considered gambling or betting. For instance, in the United States, binary options investing is feasible under strict rules overseen by the USA Commodity Futures Trading Commission (CFTC) as well as the USA Securities and Exchange Commission (SEC). These organizations are in charge of granting and revoking licenses for financial service providers.

Within Europe, the CySEC, a component of the European Markets in Financial Instruments Directive, acknowledged the binary options market in 2012 and provided guidelines for obtaining licenses to open binary options platforms. Following in Cyprus’s footsteps, Malta also implemented measures to regulate the market in order to safeguard traders and investors. The CySEC then revised the original rules to prevent scam firms from operating in the market and to discourage binary options gambling behavior.

The European Securities and Markets Authority (ESMA) placed a temporary ban on binary options contracts in 2018, which it subsequently extended many times to prevent scams and losses.

The ban made it difficult for retail brokers and traders, but it is possible to avoid the ban and trade freely by working with an unregulated, offshore binary options broker.

Following ESMA, in the United Kingdom, the Financial Conduct Authority (FCA) banned firms from selling binary options in 2019 over concerns regarding fraudulent activity in the market. However, as in Europe, British investors also have the chance to trade binary options by using offshore brokers and platforms.

These regulations, rules, and bans prove that traders should be cautious in choosing brokers for binary options. Many websites provide lists of binary options brokers blacklisted due to scam schemes. There are also some common characteristics of scammers, like creating several websites and profiles, using exaggerated advertising to grab attention, and disappearing after a short period of operation.

To find the best binary options brokers while avoiding gambling sites, traders should check reviews and use a set of criteria to judge providers, such as payouts, contract lengths, minimum deposits, bonuses, the convenience of withdrawal of funds, and the quality of the customer support team.

The Verdict; Is Binary Options Gambling?

If it is impossible to develop a strategy for a financial instrument with a positive expectancy, or if it is possible to have a positive expectancy without using any strategy, then you are probably on the verge of gambling. However, this does not apply to binary options since it is possible to design strategies that ensure more wins than losses and thus help traders make profits.

In fact, it is the trader who decides whether to use binary options as a type of gambling or as a type of retail investment based on calculated risks.

Under the current regulatory environment, binary options traders should also keep in mind that although the financial instrument itself is not a scam, it is important to find reliable brokers.

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