Binary option

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A binary option (also: digital option ) is a financial derivative that is derived from options , is one of the exotic options and belongs to the category of futures .

Only two scenarios can occur with binary options: If a previously defined event occurs, the buyer receives a fixed amount, otherwise the option expires worthless . As with traditional warrants, indices, stocks, currency pairs or commodities can be used as underlyings. You can then speculate on falling or rising prices.

As with classic warrants, there are binary buy and sell options in American and European versions.

The cash-or-nothing option pays out a predetermined amount at the end of the term, whereas the asset-or-nothing option pays out the price of the underlying or offers it itself. In contrast to American options, the trader has no way of exercising the option during the term.

variants

event Option type Condition / event Expectation for the underlying
Knock-in Call The base value must be at or above the threshold: X ≥ T in (significantly) rising prices
Put The base value must be at or below the threshold: X ≤ T in (clearly) falling prices
Knockout Call The base value must not touch or fall below the threshold: X> T out rising or sideways prices
Put The base value must not touch or exceed the threshold: X <T out falling or sideways trending prices
Range The underlying must be quoted within the thresholds: T Call <X <T Put sideways trending prices

Here stands

  • X for the price of the underlying asset and
  • T for the threshold of the binary option.

For American options , the event must occur during the term; For European options , the event must occur at the end of the term (see option (Economy) # Exercise types ).

Evaluation according to the Black-Scholes model

Relation to the classic warrants

Since a binary, European knock-in-call or put option is paid out if it is quoted in the money during or at the end of the term, its standardized price - ie the price for a payout unit - corresponds to the probability of this event. Thus, their price behaves exactly like the delta of a classic warrant.

According to the Black-Scholes model, the value can be interpreted and calculated as the first derivation of the option price from the strike price:

or for put options

is there

  • Φ (·) the distribution function of the standard normal distribution,
  • K is the strike price of the option,
  • r the risk-free interest rate and
  • t the term of the option.

Binary options trading

For a long time, binary options were traded over the counter, i.e. they were given directly by the issuer to the buyer. There was no liquid market to trade for this form of exotic option . Typically, such an option cannot be liquidated during the term unless the broker or the platform allows such a procedure. Since the unregulated trading of binary options harbors a great potential for manipulation with regard to fair play, warnings are issued at regular intervals before trading on unregulated platforms. In 2007, the US Options Clearing Corporation proposed allowing these options. The Securities and Exchange Commission then allowed cash-or-nothing binary options in 2008. The American Stock Exchange (Amex) has been offering European cash-or-nothing binary options since May 2008 . They have also been traded on the Chicago Board Options Exchange (CBOE) since June 2008. The standardization of binary options forms the basis for trading on the American stock exchange with ongoing quotation of the price.

Binary options are also offered in over -the- counter OTC trading . Since 2012, binary options trading in Cyprus (where many of these trading platforms are located) has been regulated by the Cyprus Securities and Exchange Commission (CySEC). In 2013 Malta followed suit, where binary options had previously been administered by the gambling authority. The two countries are the first to legally regulate binary options as financial instruments within the meaning of the EU MiFiD directive . The regulations for trading binary options are intended to guarantee fair play. On unregulated platforms, the transactions are not, or not necessarily, monitored and the money invested by the customer is not deposited in an escrow account. CySEC therefore warns at regular intervals against trading binary options on unregulated platforms.

criticism

Since the market for binary options attracts a large number of people who are prepared to take risks and who believe that they can realize high profits there in a short period of time, there are disproportionately large numbers of traders operating in the gray area or even fraudulent traders. It turns out to be difficult to see the seriousness of brokers in this area. Indicators for dubious providers can e.g. B. be: A broker is not admitted to the stock exchange or a trading platform is not subject to EU regulation or the regulation of the Federal Financial Supervisory Authority (BaFin). The critics point out that binary options are often constructed in a very complex way and are therefore not transparent for non-professional investors. In addition, the general terms and conditions of retailers are often formulated unclearly and contain claused risks. Binary options are advertised with exaggerated chances of winning, the risk of loss is only mentioned as a minor issue. It is often suggested that trading binary options is very easy. In fact, a lot of experience and the choice of the right strategy are extremely important. Binary options are compared to bets where long-term only losses can be expected. The only sure "profit" lies on the side of the trader, who in any case, regardless of whether the investor wins or loses, receives fees and, if applicable, premiums.

In response to the criticism, supervisory authorities and courts have since acted, for example in the case of Banc De Binary , one of the over-the-counter providers of these products based in Cyprus . In the USA, proceedings against these and other banks have been running since 2013, in which it was investigated whether the banks were violating the regulations on the American financial market. Among other things, the allegation was investigated that Banc De Binary does not collect data on the financial circumstances and experience of traders in order to carry out well-founded risk advice on this basis. In 2016, the verdict was passed, in which the banks were ordered to pay damages to the investors in the amount of US $ 7.1 million and a fine of US $ 2 million.

Because of these high risks for investors and the increasingly cross-border trade in these products that warns European Securities and Markets Authority (- European Securities and Markets Authorities ESMA) now also in general and Europe in front of binary options and similar financial products. Binary options trading has been banned in Belgium since 2016. ESMA announced on March 27th that it would ban binary options in the European Union. Since July 2, 2018, the marketing, distribution and sale of binary options to private customers has been prohibited.

Binary options are also coming under increasing pressure outside of the stock exchanges. The social network Facebook has banned all advertising for binary options since January 30, 2018, because the platform is not able to differentiate between fraudulent and legitimate offers.

Individual evidence

  1. ^ John C. Hull: Options, Futures and Other Derivatives . Prentice Hall , 2005, ISBN 0-13-149908-4 .
  2. ↑ David F. DeRosa: Options on Foreign Exchange (Wiley Financial Engineering) John Wiley & Sons (2nd edition, 2000)
  3. ↑ Goron Page: Don't Gamble On Binary Options. Forbes on July 27, 2010, accessed October 26, 2014
  4. ^ Investor Alert: Binary Option and Fraud. (pdf) Office of Investor Education and Advocacy (SEC), accessed October 26, 2014
  5. ^ Securities and Exchange Commission, Release No. 34-56471; File No. SR-OCC-2007-08, September 19, 2007. “ Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to Binary Options (PDF; 77 kB) ”.
  6. ↑ Doris Frankel: CBOE to list binary options on S&P 500, VIX . In: Reuters , June 9, 2008. 
  7. ↑ Gaming or Trading? That is the Question - MFSA To Regulate Binary Options as a Financial Product
  8. ↑ Malta The Next Cyprus? MFSA Announces Regulatory Framework For Binary Options , Finance Magnates. 18th July 2013. 
  9. ↑ regarding the supervision of binary options . In: CySEC , May 3, 2012. Archived from the original on July 10, 2012 Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. . Retrieved June 4, 2012. @1@ 2Template: Webachiv / IABot / www.cysec.gov.cy 
  10. ↑ Warning - Traderxp LTD ( Memento of the original from April 7, 2014 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (pdf), CySEC.gov (English), accessed on September 12, 2014 @1@ 2Template: Webachiv / IABot / www.cysec.gov.cy
  11. ↑ Warning - NRG Capital (CY) LTD ( Memento of the original from March 31, 2014 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. (pdf), CySEC.gov (English), accessed on September 12, 2014 @1@ 2Template: Webachiv / IABot / www.cysec.gov.cy
  12. ↑ Braun, Andreas (ARD): binary options. Dangerous stock market game. (Article in boerse.ARD.de from February 1, 2013) . Retrieved April 20, 2017.
  13. ↑ CTFC files civil suit against Banc de Binary . The Fx View. Retrieved June 19, 2013.
  14. ^ SEC Warns Investors About Binary Options and Charges Cyprus-Based Company with Selling Them Illegally in US . Securities Exchange Commission. Retrieved June 19, 2013.
  15. ↑ Press release of the US Commodity Futures Trading Commission (CFTC) from March 9, 2016 (English) . Retrieved April 20, 2017.
  16. ^ European Securities and Markets Authorities: Warning about CFDs, binary options and other speculative products. Communication ESMA / 2016/1166 dated July 25, 2016 (English) . Retrieved April 20, 2017.
  17. ↑ Financial Services and Markets Authority (FSMA) [Belgium]: Règlement de la FSMA encadrant la commercialization de certains instruments financiers dérivés de gré à gré (options binaires, CFD, ...). Announcement of August 8, 2016 (French) . Retrieved April 20, 2017.
  18. ↑ European Securities and Markets Authority: Additional information on the agreed product intervention measures relating to contracts for differences and binary options . Retrieved April 3, 2018.
  19. ↑ ESMA adopts final product intervention measures on CFDs and binary options. Retrieved July 31, 2018 .
  20. ^ New Ads Policy: Improving Integrity and Security of Financial Product and Services Ads . In: Facebook Business . ( facebook.com [accessed January 31, 2018]).