A common question we hear is “Are binary options just gambling?“. The answer is not clear cut. As with many forms of investment, binary options can be used as purely ‘punts’, but astute traders will be using strategies and techniques to ensure the last thing they are doing is gambling. So the answer is not black and white.
Is all investing gambling?
Without getting into a semantic debate about the definition of gambling, it could be argued that any form of investment is a ‘gamble’. A hedge fund manager buying a large chunk of shares in a multinational corporation has an element of risk to it. Any form of financial disaster could impact that company. The manager is (hopefully) aware of this, but is satisfied that the potential gains are worth the risk. On the flip side, a private investor might hear about a tiny internet start up trading for pennies and buy shares without any form of research into the company or it’s business model. That would strike me as a gamble.
So if we have established that it is possible to gamble in traditional share trading, it is certainly possible in binary options. But just like the hedge fund manager above, it is also possible to trade based on expected value. In my opinion, once a positive expected value has been established, the line has been crossed from gambling to investing.
Are binary options gambling?
How to avoid using binary options to gamble
Firstly, there is nothing wrong with using binary options for a flutter, as long as you know that is why you are using them and are not gambling with money you cannot afford to lose. That applies equally if you are using them to trade really! Binary options offer a quick, exciting way to speculate on the markets and are probably more entertaining than some other forms of betting, so why not? Some of the platforms are designed with gambling absolutely at the forefront of the design – flashing lights, pulsing price graphs and competitions. People who use binaries for a bit of fun are well catered for.
If however, you want to avoid using them to gamble, there are a couple of checks you can make, based on your own trading:
- Use genuine underlying assets. Some brokers, particularly at weekends, will provide ‘assets’ based on random number generators. It is not always clear that traders are not actually using ‘real world’ underlying prices though. Some are labelled ‘volatility indices’ but they are not based on any official index, purely a number generated by a computer. No amount of technical analysis or research is going to help you here. These are a good old fashioned gamble. You will never be able to establish positive expected value on a random number – if you do, the broker is effectively giving away money. How likely is that?
- Use a strategy. It is a broad statement, but needs to be – there are many strategies that work for people, and I am not going to question any of them. The point is, if you do not have a strategy for identifying the trades that might be profitable, and a money management plan to ensure risk is managed, then it is unlikely there is a positive value in the trade. The strategy might only apply to a single trade, a particular news event perhaps, but it should fit into a wider risk management plan somehow.
- Understand positive expectation. Make sure you are aware of whether the trade will be profitable or not over the long term. Any single trade can win or lose, but over the long term, would this trade prove profitable? It boils down to the payout and the number of times this trade would finish in the money out of 100. If you need to win 57% of trades to make money based on the payout you are getting, and expect the trade to win 65% of the time – you have positive expected value – go for it!
So whether binary options are gambling or not depends on the trader. They can be used to gamble, but they can also be used to invest. It all comes down to what is going on between the ears of the person placing the trade.