In the internet content business, we spend a lot of our time not being surprised by what you read. Still, we were left guessing at a 545% week-over-week jump in pageviews at "A Guide to Trading Binary Options in the U.S." and a slightly smaller surge at its foreign counterpart, "What You Need to Know about Binary Options Outside the U.S."
Binary options are in. But why? After a bit of poking around, we have some theories.
Bentleys and Boiler Rooms
First, there's the Southampton whizz kid Robert Mfune, who began trading binary options between shifts at McDonald's at age 17 and now drives a gold-slathered Bentley. That's the kind of story that would prod anyone to seek out a top-quality Investopedia crash course on the subject, but there's a hitch: the Sun, which reported that story Tuesday, is a British tabloid, but most of the traffic to our page came from the U.S.
There's another possibility. Led by the Times of Israel, which first broke the story in March, Israeli journalists and politicians have been waging war on the so-called "Wolves of Tel Aviv," shady outfits that use immigrants to peddle binary options all over the world. These operations employ boiler-room tactics familiar from Martin Scorsese's 2013 portrayal of Jordan Belfort. If they call you, we recommend you maintain a healthy amount of skepticism. Or better yet, hang up immediately. (See also, "The Wolf of Wall Street": Funded by Dirty Money?)
That brings us to a not-unrelated news item, Belgium's ban of binary options over the weekend. The country is the first in Europe to outlaw the instruments, citing aggressive marketing, high levels of risk and their lack of "connection to the real economy."
Perhaps none of the above is the real reason, or perhaps it's a combination. If you have a better answer, by all means let us know.
What are Binary Options?
Binary options may be a variety of "exotic options," but they're actually very simple, yes-or-no propositions. Here's an example: "Will the price of gold be above $1,300 at 2:00 p.m. today?" If you think so, you buy the option. If you think not, you sell it. (See also, Options Basics Tutorial.)
Come 2:00 p.m., the option will be worth either $100, if the actual price of gold fell above the strike price of $1,300 ("in the money"), or $0, if it fell below ("out of the money"). By extension, binary options trade for somewhere between $0 and $100, with the price reflecting the market's perception of the proposition's likelihood.
If gold is trading at $1,300 at 1:00 p.m. and seems to have upward momentum, the option will likely trade for something close to $100, say $85. That means the most you can profit per contract – you can trade more than one – is a modest $15. If the proposition is a longshot, the option will come cheap, limiting your maximum loss (the price you paid for the contract) and raising your potential profit.
As with stocks, there is usually a spread between the "bid" and "ask" prices, the prices you can sell and buy the option for. Also, don't forget about fees, which we ignored in the example above.
You can bet on a number of underlying assets through binary options, from currency pairs to equity indices to government data releases – think nonfarm payrolls and jobless claims.