Binary options are very high risk, even for experienced investors.
What are binary options
Also called ‘all-or-nothing’, ‘fixed return options’ or ‘digital options’, binary options enable you to make (or lose) money by predicting the short term movements in the price of a share, commodity, currency or index. Usually, the timeframes are short and you don’t have long to make your call – in some cases less than a minute. For example, you might put money on your guess that a share will trade above its current price in the next hour. If you guess correctly you could ‘win’ a fixed amount of money. If you guess incorrectly you would lose the money you invested.
Real life scam stories - Diana's story.
Diana recently lost around US$5,000 investing in binary options. She clicked an ad on a Yahoo! news article and watched slick videos about how she could ‘make easy money from home’.
Most binary options providers operate through an online platform. You have to make a minimum deposit to set up an account before you can start trading. There’s usually also a minimum amount you need to place on a trade.
Once you’ve placed a trade, in most cases your money is locked in until the option expires. If you decide you’d like to stop trading, you should receive the balance of your account back. This is the initial sum you invested, plus or minus any wins or losses. Make sure you confirm this before paying your deposit.
The main types of binary options are:
High/low – you predict whether the price will be higher or lower than the current value (the strike price) when the option expires.
One touch option – you predict whether you expect the price to hit a target (a strike price) above or below the current price. If the price hits the target just once before it expires, you’ll make money. If it doesn’t hit the target, you’ll lose the money you’ve invested.
Range option – you select a price range you expect your asset (for example a share) to trade within until the option expires. If the price stays within the range, you receive a fixed payout. If it moves outside the range, you lose your investment.
Understanding the risks
Binary options may promise to make you money quickly, but like gambling, you could lose all of the money you’ve invested.
Things to look out for
Making money from investing in binary options isn’t as simple as it looks
Most online platforms make binary trading look easy by promoting a simple three-step process – online tutorials, educational materials and pop-up chat boxes. Don’t be fooled. Guessing the short-term movements of a share price, currency, index or commodity is extremely difficult, even for professionals. It’s possible to lose a lot of money trading in this way.
Options offering high payouts (up to 500%) are likely to be structured in a way that makes the chances of winning quite low
If it seems too good to be true, it most likely is.
Some trading platforms have refused to credit customer accounts or reimburse accounts after accepting money
Most foreign traders are unregulated. This means there’s little oversight and there’s a higher risk the provider may default on its payments or the investment could be a scam. See our avoid scams page for tips on how to protect yourself.
By investing in binary options, there’s a higher chance you could become a victim of fraud
Online platforms may not be regulated, which makes fraudulent behaviour much easier. We’ve been advised of platforms manipulating software so the provider doesn’t have to pay out. Examples include changing the duration of the trade so it generates a loss or cancelling the trade altogether.
Another example of fraud is identity theft
This is where online platforms use or share the customer information they collect, without the customer’s permission.
How to reduce risk
Make sure your provider is licensed by us. A licensed provider must meet the minimum standards required by law, and we monitor them. If they don’t have a licence, don’t deal with them.
Take care when providing copies of your credit card, driver’s licence or other personal data online – particularly if the business is based overseas and not licensed in New Zealand. This puts you at risk of identity theft.
Be aware of providers offering ‘training’ and ‘tools’ that promise a particular product or technique giving access to easy money. While software programmes and training courses can teach you how to make binary trades, no person or programme can ever accurately predict how those trades will move.
Do your research, particularly if you decide to invest in an overseas business not licensed in New Zealand. It’s often impossible for you to recover your money if an overseas investment turns out to be a scam.