Binary options trading is a simplified form of financial speculation where a trader predicts whether a certain condition will be true at a certain point in time or at any point during a limited timeframe.
The most common type of binary option is the over/under option, where you predict if the value of an underlying asset (e.g. a stock price or an index) will be above (or below) a certain point when the option expires. If your prediction is right, even by just a smidge, you get paid a predetermined amount. If your predicting is wrong, even by the smallest margin, you lose your entire stake. As you can see, the outcome binary: there are only two possible results. You either get the fixed profit or make a complete loss of the amount invested in that trade.
The simplicity of this structure has made binary options popular among inexperienced traders, but it also carries significant risks, and many types of conventional risk management routines are not possible with this fixed and binary structure. In many countries, brokers are no longer allowed to market and sell binary options to retail clients (non-professional traders).
Regrettably, a lot of fraudsters are using binary options as a lure to bring in victims for their scams. In this article, we will take a look at some steps you can take to at least somewhat lower the risk of getting scammed, but also mention a few alternative financial instruments that would allow you to stay away from the binary options industry altogether.
How Binary Options Trading Works
Buying a Binary Option
Before we look at what you can do to lower the risk of being scammed, we will look at bit at how binary options work. Understanding what you are trading with is a very important step to reduce the risk of suffering from scams and other unpleasant surprises when trading. It is also important to understand how the basic structure of the binary option and the environment in which it is offered can be working against you as a trader. In many cases where an inexperienced trader burns through their account balance quickly, it is not because of any outright secret scam going on behind the curtains; it is simply because how this financial product is structured. But before we get into to why the binary option can be a bad deal for traders, let´s take a look at the basics:
- In a binary options trade, a trader selects an underlying reference, e.g. a currency exchange rate, a stock price, an index, or a commodity price.
- The trader then chooses an expiry time, which can range from a few seconds to several hours or even longer, depending on the broker’s offerings. Many retail binary options trading platforms heavily favor short-term contracts.
- If this is a conventional binary option of the Over/Under type, the trader will now predict whether the reference value (e.g. the stock price) will be above or below a specified strike price at the time of expiry. If you think it will be above, you buy an Over option, also known as a Call option or High option. If you think it will be below, you buy an Under option, also known as a Put option or Low option.
If the prediction is correct, the trader receives a fixed payout, typically between 60% and 90% of the staked amount. If the prediction is wrong, the entire stake is lost.
Example:
- You stake $100 on a binary option predicting that the EUR/USD exchange rate will be higher than its current price after one minute. The potential profit is 80% of the stake.
- If your prediction is right at the expiry, you will get a payout of $180 (your $100 stake plus $80 profit). If it’s wrong, you lose the $100.
With a conventional binary option, both potential loss and potential profit is decided in advance. There are no small profits or partial losses based on how far the market moves. Only the final outcome matters, and it is an all-or-nothing situation.
Assets Available for Trading
Binary options brokers typically offer a wide range of markets, including:
- Currencies (Forex pairs), e.g. EUR/USD, GBP/USD, USD/JPY, etc.
- Commodities, e.g. gold, silver, crude oil, and various agricultural products.
- Stock Indices, such as the S&P 500, Dow Jones Industrial Average , or FTSE 100.
- Individual Stocks, typically in huge and famous exchange-traded companies such as Apple, Tesla, Amazon, and similar.
- Cryptocurrencies, such as BTC, ETH, and LTC.
The Appeal of Binary Options
The simplicity of binary options is their main draw. Traders know exactly how much they can win or lose before entering a position, and the result depends on a simple yes/no answer. For beginners, this can seem less intimidating than traditional markets with complex order types or margin requirements.
Secondly, binary options platforms tend to favor very short-term options, e.g. the ones that will expire 30 seconds or a few minutes into the future. This is appealing for many traders, but it also makes market noise more dominant for the outcome, and super short-duration binary options trading have many similarities with luck-based casino gambling.
Another feature that attracts many inexperienced traders to the binary options platforms is that they typically allow very small deposits and you can buy options for very small amounts of money. This gives traders exposure to market movements without large capital commitments, which is important to traders on a small budget.
Risks and Considerations
The Math Is Working Against You
When you lose on a binary option, you lose 100% of your stake. When you profit, you typically profit within the 70%-90% range. This model means that traders must win more than half of their trades just to break even. For instance, if you are picking options that give an 80% payout, you would need to win at least 56% of your trades to avoid losing money over time. That is just for breaking even. This mathematical disadvantage, combined with fast expiries and unpredictable market movements, makes consistent profitability difficult.
Needing to win at least 56% of trades to break even might not sound high, but few traders manage to attain this level when they are using short-term binary options. Over short-duration lifespans, market noise will dominate, and it is really difficult to have an edge. For an inexperienced trader, it will be even harder.
A Built-In Conflict of Interest
Within the retail binary options industry, your broker is typically also your counterparty in each trade, instead of being an intermediary that routes your order to an open market. Since your broker takes the other side of your trade, the broker wins each time you lose, and vice versa. This creates a built-in conflict of interest. When binary options are structured so that the broker profits when the client loses, it is easy to understand why the industry has become plagues with sketchy brokers and fraudsters that manipulate price feeds to prevent traders from winning important trades.
A broker being a market maker and taking the other side in each trade is not unique to the binary options field. There are actually a lot of retail brokers that use this model, and they are known as dealer-desk brokers (DD brokers) and market makers. The problem arises when this type of broker is not regulated and licensed by a strict financial authority that will supervise the broker and enforce strong trader protection rules. Retail traders who want to engage in conventional short-term market speculation (e.g. on stocks, forex, or commodities) without using binary options, can typically (depending on jurisdiction) find a broker that is strictly supervised. Within the binary options field, this is much more difficult, and this increases the risk of binary options brokers employing dishonest tactics to boost their own profits. You can find out more about regulation further down in this article.
Conventional Risk Management Will Be Difficult
With linear positions, you can employ conventional risk management routines such as stop-loss and take-profit orders. You can decide to cut your losses and exit a position early, e.g. losing 10% of your stake and getting the rest back. You can put in a take-profit order that will execute at a point of your choice, e.g. as soon as you have made a 20% profit, instead of hoping for the big 85% profit. With conventional binary options, these actions are not possible. You either profit the per-determined amount or lose the entire stake, and this means that some of the conventional risk-management tools are useless.
The Retail Binary Options Industry
The retail binary options industry is, regrettably, rife with fraudulent brokers who engage in practices such as price feed manipulation and withdrawal stalling and blocking. For an inexperienced trader, it can be really difficult to find a trustworthy binary options broker.
Regulation
Many regulators, including those in the U.S., Canada, U.K., Australia, and much of Europe, have either banned brokers from selling binary options to retail traders or put really limiting restrictions in place. Check if your country has banned Binary Options.
Other countries have selected to keep retail binary options trading regulated, but require the brokers to be licensed and adhere to certain rules. There are also countries where binary options brokers operate in a legally opaque area. There is no specific binary options legislation, and brokers can not apply for a suitable license. Finally, we also have countries that deliberately market themselves as laissez-faire jurisdictions to attract financial service providers that wish to operate from this type of environment. Many of these countries are also well-known tax havens.
A lot of the countries around the world that are known to both have and actually enforce really strong trader protection rules are also the countries that have banned brokers from selling retail binary options, which means traders in these countries who still want to buy binary options seek out foreign brokers, and typically end up with a platform licensed in one of the laissez-faire countries where brokers are subject to almost no supervision from the authorities and it can be really difficult to get any help with conflict resolution.
When there are no trader protection rules (or when rules are not enforced), no one is making brokers use transparent pricing, segregate client funds, and publish accurate information about risks and payouts. Trading with poorly supervised platforms is known to be high risks, as there is no oversight to prevent manipulation or ensure that withdrawals are honored.
How To Reduce Risk
Start by deciding whether you truly need binaries
If your attraction is fast decisions, defined risk, and limited capital at stake, understand that other alternatives may be available to you, depending on your jurisdiction and knowledge level. Further down in this article, you can find out more about a few possible alternatives: mini futures contracts, contracts for difference (CFD), and vanilla options. The ideal is to pick an instrument that is offered by a licensed broker in your jurisdiction, and where you can use conventional risk-management tools and routines.
If you nevertheless choose binaries, treat the activity as highly speculative and risky, and put a low and firm limit on everything, including deposits, position stakes, and time spent per day and per week. Also take steps to make sure your personal information does not end up in the hands of scammers. You can run into problems that are considerably bigger than simply losing your $100 deposit if you get involved with scammers.
Work only with verified licensed brokers
Before opening an account, identify the company’s exact legal name, registration address, and license details as they appear in terms. Go to the applicable regulator´s public register and look for that entity, not just the brand. Do not follow a link from the broker; find the financial authority on your own to make sure the site address is correct.
Traders should always verify a broker’s license with the relevant financial authority before opening an account, because a fraudster can lie about being licensed. If you cannot find the entity or the license covers a different service than binaries, you are dealing with platform risk, not just market risk.
For a licensed broker, confirm important details such as activities covered by the license, client-money segregation rules, and complaint pathways. If you are using a foreign broker, check if you, who are trading from another jurisdiction, still enjoy the same rights as domestic traders, and if you are covered by any governmental insurance scheme that will step in if the broker becomes insolvent and can not honor its obligations.
Verify who will actually hold your money
Marketing brands and the actual legal entity you sign up with can be different companies. Read the client agreement to see which entity becomes your contractual counterparty and custodian of your funds. If funds are held by a third party, identify the bank or trust and the jurisdiction governing that arrangement. Ambiguity here is a warning that recoverability is weak if things go wrong.
Keep balances small and test withdrawals immediately
Never send more than a small test deposit at the start, even (or especially) if the broker wants to entice you into making a big first deposit by offering a huge matching welcome bonus.
Place one or two tiny trades, then submit a partial withdrawal and wait. If the platform invents new document requests (beyond what is required by law), resets the clock after every upload, or changes banking instructions mid-process, cut your losses and leave.
Repeat this “withdraw early, withdraw often” habit even after you scale up. Profits that never reach your bank are not profits.
Stay away from bonus offers that will freeze your account from withdrawals.
Some fraudsters play the long game, and withdrawals will work great at first. Then, when you have felt safe enough to make bigger deposits, you will start encountering stalling and freezes.
Refuse bonuses and turnover conditions
Bonuses, “risk-free” credits, and accelerated tiers usually come with wagering or turnover requirements that convert your balance into a hostage. Decline promotions in writing before your first trade, and check that your account shows zero bonus liability. If a platform auto-credits a bonus, insist on removal before you trade, otherwise you will discover later that withdrawals are blocked until unrealistic trading volumes are met. It is a way to entice traders to make additional deposits and make a lot of trades, hoping they will manage to unlock the money in their account. Do not throw good money after bad.
Price transparency you can audit
A fair platform publishes the pricing source and time synchronization used to settle expiries. Before risking any money, compare their quote stream at expiry against at least one independent feed with recorded timestamps. If you observe frequent “last-tick” differences, you are learning something important about execution quality. Keep screenshots and server-time notes, but be aware that a poorly regulated broker might simply ignore your complaints, no matter how much evidence you have. Are you ready to hire a foreign lawyer and take on a full court case abroad in your effort to get back those $1,000 from a broker in the Seychelles, Mauritius, or St. Vincent and the Grenadines (SVG)?
Lock down platform permissions and refuse remote access
- Never allow “account managers” or anyone else to screen-share, take remote control of your device, or place trades for you.
- Disable auto-invest features.
- Regularly go over platform permissions and turn off any permission that is not absolutely necessary.
- Use unique passwords and two-factor authentication.
Fund through reversible, documented rails
- Use bank transfers, cards or other solutions that come with clear statements and potential chargeback rights where lawful and appropriate.
- Avoid wire transfers.
- Avoid cryptocurrency transfers.
- Do not send money to an entity that do not match the entity you signed up with. Match the beneficiary on your instructions to the licensed entity in your agreement.
Read the terms the way a lawyer would, especially the parts about money
Focus on sections covering client-money segregation, negative-balance policy, pricing and settlement, conflicts of interest, complaints handling, dispute resolution venues, and the precise conditions for withdrawals. If the contract says disputes must be heard in an offshore micro-jurisdiction with no retail trader protections, adjust your deposit size accordingly or walk away.
Keep an evidence trail from day one
If your broker is based in and licensed by a jurisdiction that is not overly lax when it comes to trader protection, make sure you keep an archive that can come in handy if you ever need to file a complaint. (If your broker is based in one of the laissez-faire countries, having a stack of evidence might not help much, as they might be able to simply ignore your complaints without running in to much push-back from the authorities.)
Archive the full site at sign-up, save every chat transcript and email, export account statements weekly, and record ticket numbers for support interactions. When you raise a pricing or withdrawal dispute, present timestamps, independent quotes, and the exact contract clauses you believe were breached.
Use community intelligence without outsourcing judgment
Search for regulator warnings, enforcement actions, and credible long-form complaints that describe the same patterns you’re watching for: withdrawal stalling, bonus lock-ins, expiry disputes, impersonation of regulators, entity shell games, etcetera. Weigh reports that include dates, amounts, and documents more heavily than anonymous star ratings. If multiple independent sources describe the same playbook, pay attention. Every broker, even the best ones, have some disgruntled clients that will whine online, but with some brokers you can clearly see a pattern of recurring fraud and misconduct, and it is best to stay away from them.
Control your own risk exposure like a pro dealing with operational risk
Cap account size, cap single-trade risk, and set a calendar reminder to sweep excess cash back to your bank on a fixed schedule. Even if the platform pays quickly and consistently for three months, do not change the rules.
You can also consider the pros and cons of segmenting risk across multiple providers.
Have an exit plan before your first deposit
Know exactly what will trigger a complete stop, e.g. a refused partial withdrawal, a pricing dispute you can prove but can’t resolve, or an unexplained account freeze. When any of those occur, stop depositing. Escalate through the documented complaints route, but not before you have copied and preserved your file in case a card issuer, bank, or regulator request follows. Hope is not a strategy, pre-commit to your line in the sand.
Explore Safer Alternatives
If what you want is defined-risk, short-duration trading, and the ability to gain exposure to different types of underlying assets, alternatives to binary options are available, at least in most jurisdictions. You can for instance look into mini futures contracts, vanilla options, and contracts for differences (CFDs). They are still risky instruments, but in many jurisdictions even retail traders can access them through strictly regulated brokers which reduces counterparty risk. You want a trading environment characterized by independent price discovery, clearing, and real avenues for redress, and you want to be able to use standard risk-management tools and routines.
What are futures contracts?
A futures contract is an agreement between two parties, and it is binding for both of them. The buyer agrees to purchase the underlying asset when the contract expires, and the seller agrees to sell it at the agreed price, no matter what the market price is when the contract expires. In short, futures contracts let people manage risk (hedging) or bet on future price changes (speculation).
Example: WTI crude oil is $80 per barrel today and you buy a futures contract for delivery in three months at $80. The oil price rises to $90, so you earn $10 per barrel. If it falls to $70, you lose $10 per barrel.
Futures contracts are standardized and mostly traded in exchanges, which reduces counterparty risk. Speculative traders make sure they cancel out their futures contracts well before they expire, since they are not interested in actually buying or delivering the underlying asset.
Mini futures and micro futures are smaller version of regular futures contracts, and they give smaller-scale traders a chance to enter the market without having to take on the full risk of a standard sized futures contracts.
Example: A standard S&P 500 futures contract represents $250 × the index value, but an “E-mini S&P 500” (the mini version) only represents $50 × the index value. So if the S&P 500 is at 5,000, the standard futures value would be $1.25 million and the mini futures value would be $250,000. The E-mini Micro value would be $25,000.
When you enter a futures contract, you don’t pay the full contract value upfront. Instead, you deposit a small percentage of the total value, usually between 3% and 12%, depending on volatility. This deposit is called the initial margin. So, if the initial margin is 5% for a contract worth $25,000 you would deposit $1,250. It’s a good faith deposit that both the buyer and the seller must put up to ensure they can meet their obligations on the contract. During the lifespan of the contract, it is enough to keep the maintenance margin high enough. If your balance falls below the maintenance margin level, you’ll get a margin call, which means you must add more funds or close the position. The maintenance margin requirement is usually significantly lower than the initial margin, depending on the contract and exchange rules.