Binary Options have been hit hard by the regulators globally recently, even CySEC considering to ban Binary Options. However it still remains a hot topic in many under-regulated countries. Surely, lack of knowledge and experience is the main issue when it comes to Binary Options and overall this misconception have direct impact for the rest of true retail financial markets.
“Is Binary Options Gambling or trading?” – article aims to help traders and those who want to make side income online by defining if Binary Options is gambling or trading. We’ll explain what makes binary options a financial product and what makes it a casino product.
Binary Options – Trading or Gambling?
It is not a surprise that even regulators are confused on how to classify Binary Options. Is it a gaming product or a financial product?
- Is Binary Options gambling? If yes, why not to put it under gaming regulation.
- Is Binary Options a financial product for trading? If yes why not to apply financial regulation to its full extend?
In short industry regulators throughout the world do not know whether to classify binary options as a financial instrument or gambling product. This issue has opened too many loopholes in the system and of course many Binary Options scams have risen due to these loopholes. Of course, ordinary traders are the ones baring major losses. However, this does not mean that Options are fake products.
What are options?
“In finance, an option is a contract which gives the buyer (the owner or holder of the option) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specific strike price on a specified date, depending on the form of the option.” This is the Wikipedia definition of Option in Finance.
There are indeed various types of binary options:
- Fully regulated binary options that trade on the NYSE and NADEX
- Binary Options Exchanges known to most traders as Bucket Shops
Is Binary Options Gambling?
Simply put, gambling is “betting on an uncertain outcome, as of a contest”. In another word, gambling is taking a risk in the hope of gaining an advantage or a benefit. In binary options, it is committing your put or call orders in order to gain a financial return.
Indeed, in our Forex Halal or Haram article we discussed about how gambling could make Forex Haram too. Is it the same in Binary Options? Let’s come back to this in a bit.
Is Binary Options a financial product?
Options are financial products. Since their inceptions, analysts have focused on developing trading a systems with positive expectancies. Making, Options a financial product. What about Binary Options? In retail market as we know, none of the orders executed by the binary options providers go to market. Thus, you “trade” or actually play against the house. As a result, even if you have a good strategy you end up in the hands of hungry sharks, your broker!
Since Binary Options brokers are built on pure market making platforms, I don’t think any binary option broker would like you to make money!
How to distinguish trading from gambling?
There is a thin line between trading and gambling. The good news is that you can test yourself to see if you really are trading or gambling. To test yourself, you need to look into yourself, what you are trading and how you are trading.
- Why are you in Binary Options? You got a call or heard that Joshua made X amount in a day with Binary Options. It means you are attracted by your greed. You are likely to gamble too!
- What are you are trading?Do you understand the fundamentals of the instrument you are trading? If you can not develop a proper trading strategy for yourself with a positive P&L results end of the day, you will be gambling!
- How are you trading?If you don’t have a defined set of entry/exit rules, then you are gambling!
Let’s add more variables into this.
Time is money, we all get it! However, it is almost impossible to put a financial product into time perspective. Even the best fund managers will fail to predict what will happen to the market in 5-10 minutes. They can analyze the price however can not put it into timeline.
It is already difficult to analyze a product from price perspective. Trying to trade a product against a selected time period will make you lose on the long run. The house wins all the time!
Is Binary Options haram?
Since we have many traders from South East Asia asking us if Binary Options is Haram or Halal, let’s look into this subject too.
Sharia law is not clear even with the traditional finance as we know. Majorly there are 2 problems when it comes to trading as far as Shariah law is concerned:
- Earning interest (Riba)
- Greed or gambling
Even if you manage to bypass the Riba issue in Binary Options, you will still have issues with Greed and Gambling. Binary Options is Haram if you have greed involved. Binary Options is Haram if you are gambling.
Although, you can find a way to have Halal Forex trading, in Binary Options it will not be very easy. This means that you have to avoid greed in every case and find a way to take decision based on logic, not based on speculation. If you can not keep up with these terms, your Binary Options will be Haram. Thus, Binary Options is not permitted under Islam.
Is Binary Options gambling or trading?
To find an answer to the issue as to whether Binary Options gambling or trading, every trader must analyze his/her swing (long term) objectives. Are you able to generate your strategy with a long term positive expectancy?
If your trading strategy is not mathematically stable, it means you don’t have a solid strategy. If you can not defend your strategy for flaws or for its logic, you are then most likely gambling. In traditional binary options as you know, you are likely to be gambling. Just like in casino’s you are against the house. Especially with maximum return being fixed at 80% even your money management is flawed as well. The odds are in the broker’s favor. If you win you will always profit less than what you risked with the 80% return zone. Instead of you, your broker has a positive expectancy. Even with 50/50 chance with the 80% return, you will make a loss, while your broker will make money on your name.
Conclusion: Retail Binary Options is Gambling
To sum it up, Retail Binary Options as you know is designed for traders to make losses. They target people failing to cntrol their greed. Especially, if you have lost your job, or are financially distressed, you are likely to fall a victim to one of many binary options scams. Many traders have lost hundreds of thousands of USDs into this industry as they never understood their trading objectives. As a result, we can conclude that Binary Options is a gambling product.