The top 7 myths about binary options

August 13, 2020
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See our top 7 binary option myth busters as we correct some of the common misconceptions about these contracts.

There are lots of common myths about binary options – and we think it’s time to put an end to them. Here, we shed light on the top 7 myths surrounding binary options and reveal the truth behind them.

Myth 1: binary options are just betting

Binary options may look like a $100 bet because they simplify trading down to a yes or no question: will this market be above this strike price at this expiration time? Yes or no?

If you think yes, you buy the binary option. If you think no, you sell.

But exchange-traded binary options also let you exit the trade before the expiration time, giving you as much flexibility as other forms of trading, like futures, forex, or stocks.

You can choose from a number of strike prices, adding further layers of choice. And the price of the binary option is not fixed by the ‘house’. On a binary options exchange regulated by the Commodity Futures Trading Commission (CFTC), the buy and sell prices are determined by supply and demand, generated by the market participants including market makers and traders themselves. The exchange never participates in the trading.

In other words, binary options on a CFTC-regulated exchange are no more like ‘betting’ than other exchange-traded instruments like stocks or futures.

Myth 2: account managers can trade binary options for you at Nadex

Nadex is an exchange, and all members must trade their own accounts. It’s very important you know this to protect you and to protect your money – if someone approaches you saying that they are a trader working for Nadex, this is simply not true. We have an expert customer service team who will be happy to answer your questions and even walk you through your first trade, but we don’t employ anybody who can trade your account on your behalf.

The Nadex platform was designed by traders, for traders. It’s very simple to navigate, and you’ll be able to find your way around easily – no brokers needed. See our platform walkthrough to help get you started.

Please be vigilant if you are approached by unregistered brokers or advisers. Some red flags include:

  • Contacting you directly on social media, while posing as a Nadex employee, promising guaranteed profits. We would never contact you in this way – anyone doing so is not associated with Nadex.

  • Contacting you directly using any form of communication, instructing you to contact them or another individual via WhatsApp or similar application.

  • Requesting money, even bitcoin, to trade on your behalf.

Again, only you are allowed to trade your account at Nadex. Learn more about what to look out for and read the customer protection advisory issued by the CFTC.

Myth 3: binary options are illegal

Not true! It is completely legal to trade binary options in the US – as long as you are using a regulated exchange like Nadex.

Nadex is a CFTC-registered Exchange and Clearinghouse – as a legal provider of binary options trading, in compliance with CFTC rules and regulations, this is how we operate:  

Difficulties arise because there are so many unregulated binary options providers, mainly outside of the US – more on that next.

Myth 4: binary options are not regulated

Many binary options that are traded over-the-counter outside of the US are not regulated.

However, in the US, the CFTC – the same government agency which regulates futures exchanges – has authorized several binary options exchanges, with strict guidelines and regulatory oversight.

The largest of these CFTC-regulated exchanges for individual retail traders is Nadex.

Myth 5: binary options may only be bought, not sold

In fact, it is as easy to sell as to buy when you're trading binary options. Unlike short-selling in stocks, there is no margin involved. Your maximum risk is limited and will be calculated on the order ticket when placing a trade, excluding exchange fees.

If you buy a binary option, you get a $100 payout if the indicative price is above your strike price at expiration.

If you sell a binary option, then you get a $100 payout if the indicative price is at or below your strike price at expiration.

Other than that, there is no difference between buying and selling a binary option at Nadex.

Myth 6: binary options are not transparent

This may be an issue with the overseas binary options providers mentioned above. However, CFTC-regulated binary options exchanges in the US must adhere to strict regulations and guidelines to ensure that you receive accurate and up-to-date time and sales data on all bids, offers, and trades throughout the trading session. This information is made publicly available on the website here.

You can be sure that the exchange will never take the other side of your trade. The exchange is simply matching buyers and sellers in the transaction.

Myth 7: trading binary options requires a lot of capital

The minimum opening balance on Nadex, the largest CFTC-regulated binary options exchange in the US, is significantly lower than the typical opening balance of a futures trading account or even most forex accounts.

All binary options are priced between $0 and $100. In other words, your cost to trade a single binary option contract will be $100 or less, plus a low trading fee. There are no commissions, since you trade directly on the exchange and not through a broker.

You can't enter a trade unless you have enough funds in your account to pay for it. In other words, you can never trade on margin. Thus, you will never get a margin call.

And since your maximum possible loss is limited (and calculated on the order ticket when placing a trade, excluding exchange fees), you don’t require any additional ‘cushion’ in your account in case the market suddenly goes against you. Even if your prediction is wrong, your loss will always be limited, guaranteed.

With binary options, the maximum risk and the potential profit are fixed to amounts which you choose before you place the trade.

Open a live account to start trading binary options today

Sign up for a live account with a low minimum deposit of $250.

You can also take advantage of our initial deposit bonus – simply sign up for a live account, fund your account with an initial deposit of $1,000 or more, and receive $100 in account credit after you place five trades within 30 days of funding.

Try trading binary options for free

Still need more practice? Sign up for a Nadex demo account – you’ll get $10,000 in virtual funds so you can see what it’s like to trade binary options with a regulated provider.

FAQs

What are binary options?

Binary options are a financial instrument that provide a fixed payout if the underlying market moves beyond the strike price. You decide whether a market is likely to be above a certain price, at a certain time. Trading a binary option is like asking a simple question: will this market be above this price at this time? If you think yes, you buy, and if you think no, you sell. Nadex Binary Options enable traders to predict the outcome of an underlying market’s movement. Learn more about how binary options work

How do binary options work?

There are three key elements that make up a binary option contract: 

  • The underlying market. This is the market you choose to trade. 

  • The strike price. The strike price is central to the binary option decision-making process – to place a trade, you must decide if you think the underlying market will be above or below the strike. 

  • The expiration date and time. You can trade binary options lasting for up to one week, with durations as short as five minutes. 

Learn more about how binary options work

Are binary options legal?

Yes, binary options are legal to trade with a regulated provider in the US. It’s not just legal to trade binary options in the US – it’s regulated, has low capital requirements, and is accessible to retail traders. Look out for CFTC regulation to make sure the exchange you are trading on has legal oversight to protect you against unscrupulous market practices. Additionally, ensure the exchange is based in the US and that you trade your own account. Learn more about how binary options are regulated

Is binary options trading risky?

It can be! Here are some steps to follow so that you can trade binary options more securely: 

  • Only trade with a CFTC regulated exchange. 

  • Don’t engage with anybody who claims to be a broker, or who says they can trade your account for you.  

  • Trade your own account.  

Try trading binary options on a regulated exchange for free! The best way to trade more confidently is through practice on our binary options demo account with $10,000 in virtual funds. 

How do binary traders make money?

Binary traders can make money by correctly predicting whether a market will be above a specific price at a specific time. At expiration, you either make a predefined profit or you lose the money you paid to open the trade. Binary options are priced between $0 and $100. Each contract will show you the maximum you could gain and the maximum you could lose. If your trade is successful, you receive a $100 payout, so your profit will be $100 minus the money you paid to open the trade.  If your trade isn’t successful, you don’t receive a payout. This means you lost your capital, but nothing else, because your risk is capped. 

What's the difference between options and binary options?

Binary options are short-term, limited risk contracts with two possible outcomes at expiration – you either make a predefined profit or you lose the money you paid to open the trade. The payoff is fixed on either side of the strike price. Options, also called vanilla options, have a payout that is dependent on the difference of the strike price of the option and the price of the underlying asset on one side of the strike price while fixed on the other. Options can be complex, difficult to price, and have the potential for outsized profits or losses. 

What's the minimum deposit for a binary options trade?

At Nadex, the minimum deposit to open a live account is $250 and the minimum incremental deposit thereafter is $100. Binary trades at Nadex are priced between $0 and $100, excluding exchange fees. The cost to secure a trade is always equal to the maximum risk and is required to have in your account when the order is placed. Not ready for a live account? You can practice trading binary options for free with our binary options demo account

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