Binary option

A binary option is a financial exotic option in which the payoff is either some fixed monetary amount or nothing at all.[1][2] The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The former pays some fixed amount of cash if the option expires in-the-money while the latter pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options (FROs) (on the NYSE American).[3]

While binary options may be used in theoretical asset pricing, they are prone to fraud in their applications and hence banned by regulators in many jurisdictions as a form of gambling.[4] Many binary option outlets have been exposed as fraudulent.[5] The U.S. FBI is investigating binary option scams throughout the world, and the Israeli police have tied the industry to criminal syndicates.[6][7][8] The European Securities and Markets Authority (ESMA) has banned retail binary options trading.[9] Australian Securities & Investments Commission (ASIC) considers binary options as a "high-risk" and "unpredictable" investment option, [10] and finally also banned binary options sale to retail investors in 2021.[11]

The FBI estimates that the scammers steal US$10 billion annually worldwide.[12] The use of the names of famous and respectable people such as Richard Branson to encourage people to buy fake "investments" is frequent and increasing.[13] Articles published in The Times of Israel newspaper explain the fraud in detail, using the experience of former insiders such as a job-seeker recruited by a fake binary options broker, who was told to "leave [his] conscience at the door".[14][15] Following an investigation by The Times of Israel, Israel's cabinet approved a ban on the sale of binary options in June 2017,[16] and a law banning the products was approved by the Knesset in October 2017.[17][18]

On January 30, 2018, Facebook banned advertisements for binary options trading as well as for cryptocurrencies and initial coin offerings (ICOs).[19][20] Google and Twitter announced similar bans in the following weeks.[21]

  1. ^ Breeden, D. T., & Litzenberger, R. H. (1978). "Prices of state-contingent claims implicit in option prices". Journal of Business, 621–651.
  2. ^ Gatheral, J. (2006). The volatility surface: a practitioner's guide (Vol. 357). John Wiley & Sons.
  3. ^ Binary Option Definition Investopedia. Retrieved 2013-06-30.
  4. ^ Cite error: The named reference Globes 12-15-16 was invoked but never defined (see the help page).
  5. ^ "Binary Options Fraud". Federal Bureau of Investigation. Retrieved 2017-05-30.
  6. ^ Weinglass, Simona (February 15, 2017). "FBI says it's investigating binary options fraud worldwide, invites victims to come forward". The Times of Israel. Retrieved February 15, 2017.
  7. ^ Cite error: The named reference ToIidesofM was invoked but never defined (see the help page).
  8. ^ Cite error: The named reference :1 was invoked but never defined (see the help page).
  9. ^ "ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors". www.esma.europa.eu. Retrieved 2019-03-21.
  10. ^ "Binary Options Trading In Australia: How Safe Is It?". International Business Times AU. 2018-05-14. Retrieved 2018-05-22.
  11. ^ "21-064MR ASIC bans the sale of binary options to retail clients". Australian Securities & Investments Commission. Retrieved 8 March 2022.
  12. ^ Weinglass, Simona (March 4, 2017). "As Israel-based financial fraud soars, police swoop on 20 suspects as part of global, FBI-led sting". The Times of Israel. Retrieved March 4, 2017.
  13. ^ Press Association (18 May 2017). "Richard Branson says scammers are using his name to dupe investors". The Guardian. Retrieved 18 May 2017.
  14. ^ Cite error: The named reference israeltimes1 was invoked but never defined (see the help page).
  15. ^ Cite error: The named reference israeltimes2 was invoked but never defined (see the help page).
  16. ^ Tova Cohen (June 18, 2017), "Israel cabinet approves ban on sale of binary options", Reuters, retrieved 2017-07-15
  17. ^ Weinglass, Simona (October 23, 2017). "Israel bans binary options industry, finally closing vast, 10-year fraud". The Times of Israel. Retrieved October 24, 2017.
  18. ^ Tomer, Uri (2017-10-24). "Israel Bans Binary Options Industry That Defrauded Millions". Haaretz. Retrieved 2017-10-24.
  19. ^ Frier, Sarah; Verhage, Jules (January 30, 2018). "Facebook Bans Ads Associated With Cryptocurrencies". Bloomberg. Retrieved February 7, 2018.
  20. ^ Cornish, Chloe (January 30, 2018). "Facebook and regulators move to halt cryptocurrency scams". Financial Times. Archived from the original on 2022-12-10. Retrieved February 7, 2018.
  21. ^ Weinglass, Simona (March 28, 2018). "European Union bans binary options, strictly regulates CFDs". The Times of Israel. Retrieved March 21, 2019.