The Binary Options industry officially started in 2006 by the leaders of the online gaming industry. During the years leading up to the great recession, the stock market was reaching all time highs on a daily basis. Discussions of stock market movements and currency swings started to become dinner time table conversations. When the stock market crashed in 2008 and the housing bubble burst, there began many conversations about exotic options. Henge funds where creating all kinds of unique derivative instruments for trading.
From all the excitement and thrill of trading, the Binary Option industry was born. Online gaming companies were looking for a product that would appeal to investors. A product that was easy to trade, highly rewarding, and tied to the financial markets. Options have been around for many years, but with the variety of strike prices and expiration dates, regular traders where too confused. The binary option gave traders a simple way of playing the market similar to sports betting.
In the infancy of the industry, there was confusion as to the categorization of binary options. Is it similar to spread betting, which is very popular in the United Kingdom or is it outright gambling like Roulette. The European countries ruled that a binary option is a financial instrument and it should be regulated like a stock broker or investment firm. The United States has also deemed binary options to be a financial instrument, but has not been quick to regulated the industry. The American CFTC does not regulated the binary option brokers, because there is no centralized exchange of binary options. A binary option is sold by the broker to the trader. The CBOE which lists options and the various option exchanges in America employ market makers, which is not something that exists in the binary option industry.
The comparisons to gambling are widespread, however there is a major difference between binary options and a casino game. Casinos have fixed odds and statistics that govern all their games. For example, blackjack has a dealers edge of 51% to 49%. With a binary option, it is not a 50 – 50 change that the stock or underlying asset will rise or fall. If that where the case, then every money manager on wall street would be considered a professional gambler. Day traders and trend followers work the markets on shorter time frames and have the ability to anticipate movements of assets that will occur in the coming few minutes. Momentum traders will jump onto emerging trends in stock indices and Forex. Event traders will trade around economic releases and news events.
Binary option trading is not for everyone. All binary option brokers include a risk warning on their sites similar to this warning. “Trading Binary Options is highly speculative, carries a level of risk and may not be suitable for all investors. You may lose some or all of your invested capital, therefore you should not speculate with capital that you cannot afford to lose.”