Recently I was involved in a conversation with some traders regarding CFTC-regulated binary options in the United States versus the various offshore binary option brokers that solicit U.S. clients. Traders may have a differing views regarding the pros and cons of certain platforms and models, but one thing that is very relevant to everyone is payout.
Most, if not all, non-U.S.-based binary options providers offer a type of return called a fixed payout. With a fixed payout, you enter a trade by choosing whether you believe price will settle higher or lower at expiration than the current price at the time the trade is entered. If your trade is successful, you will received a fixed payment amount if successful, whether price only moves slightly or extremely in your chosen direction. Although this may have some appeal, the downside of this is that many of these providers offer about an 80% return at best.
While this may not seem too concerning at first glance, let’s break it down more. For example, let’s say you are trading with a broker from outside the U.S. offering an 80% fixed payout and you risk $10 per trade on ten consecutive trades. If you are profitable on five and lose on five, you would probably be like most traders and want your profit/loss to be a net of $0. However, with an 80% payout, being right on five and wrong on five would result in a net loss of $10. In fact, in order to simply break even with an 80% return payout, a trader would need to be successful on 12 out of 20 trades, or close to 60% – and again, that is to break even, not end up in profit.
Let’s take it a step further. At times when the markets are less traded, there are some non-U.S. binary brokers that reduce the fixed payout to as low as 60%. Using the same example of risking $10 on ten trades, if you’re right on five and wrong on five, you would end up with a $20 loss even after splitting your trades.
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