Binary Options: Standing Up to Fraud in a Controversial Industry

12/21/2017 10:48 am ET

Options trading is a legitimate and respected method to earn a profit in the financial markets, but not all options are created equal. While many options operate in transparent, liquid markets that are well regulated and include reputable investment industry leaders, binary options have not fared so well.

Binary options have the potential to act as a legitimate investment tool, but some bad players in the industry have turned binary options into a bigger source of fraud than investment gains. Read on to learn more about binary options, how they work, and how you can avoid trouble in this fraud ridden industry.

What are binary options?

In investments, options are an investment tool that gives you the right to buy or sell a specific investment at a future date at a future price. For example, you can buy an option on Apple stock at a fixed price at a specific time. Let’s say you think APPL will be above $200 per share three weeks from today.

You can buy an option that would allow you to earn a profit if APPL is indeed above $200. If the share price is below $200, your option would not be “in the money” and would expire. Your total loss would equal the amount you paid for the option. If it is above $200, you could exercise your option and earn a profit on the difference in the stock price between the $200 option you picked and the current price. Your level of profit depends on the share price, but your loss is limited.

Binary options work similarly in most aspects. At the time the options mature, they are either a winner or loser. Unlike traditional options, there is no flexibility in the amount you profit based on the underlying asset value. Instead, it is either a win or a loss. There is nothing in between.

In the United States, binary options are always priced between $0 and $100. Investors may buy one or multiple at the same time. Every binary option has a buyer and a seller, and one person wins and one loses in every case. The Nadex, or North American Derivatives Exchange, is a legal, regulated market that allows traders to buy and sell binary options. But, as you can see, they can be quite confusing. And a confusing financial product is ripe for abuse.

Illicit companies target at-risk consumers

Elderly adults are often the biggest targets of financial schemes, thanks to their likelihood of holding significant assets for retirement and their typically low sophistication with technology and modern financial products. However, anyone can be a target of financial product fraud.

Binary options have been particularly ripe for fraud, as the product can be explained away as a simple, low-risk path to “guaranteed profits” with limited risk. Here’s a tip for you, there is no such thing as a guaranteed profit in the investment world. If it were that easy, everyone would be doing it!

Bad guys around the world see an opportunity here, and binary options is one of the worst industries for financial fraud today. Binary options fraud is so rampant that both the Securities and Exchange Commission (SEC) and the Federal Bureau of Investigation (FBI) have dedicated pages warning consumers of the risk of binary options, and high likelihood of fraud.

Fraudulent “businesses” operate by offering binary options to consumers, but they don’t uphold their end of the deal. They persuade clients to deposit large sums of money and refuse to cash out accounts, they engage in credit card and wire fraud, and they manipulate software to purposely make it look like investors lose the bet. And they sell this product with high pressure phone calls that look more like something from the movie Boiler Room than a legitimate Wall Street operation.

If it sounds too good to be true, it probably is. And in this case, the high-pressure cold-calls promising big profits are working. The FBI reports that in 2011, they received four complaints about binary options fraud with a total loss of about $20,000. In 2016, they received hundreds of complaints totaling millions of dollars in fraudulent losses.

Not all binary options are bad

While it is easy to bash the entire binary options industry for this fraud, it is important to note that there are some legitimate players. However, the legitimate players get a bad reputation thanks to the fraudsters in binary options.

If you work with a legitimate investment brokerage and trade through a regulated exchange, you only risk your investment losses. However, some countries have made binary options trading illegal for everyone, as such a large portion of the industry is fraudulent.

Israel was a longtime hub of binary options fraud, as forex and other options trading has very loose regulations in the small country. Israel’s parliament, the Knesset, voted in October 2017 to completely outlaw the binary options industry from operating in the country, as fraud victims are estimated to be in the hundreds of thousands.

Standing up for victims

In Israel and around the world, the media, law enforcement, and regulators all play an important role in preventing fraud and protecting victims. Israeli journalist Shimona Weinglass is a strong advocate for consumers, and recently published a strong condemnation of illegal binary options traders and their new ventures into the cryptocurrency markets.

Several companies have come to the forefront of consumer protection, turning the law into a tool to gain restitution for victims. One of the leading companies winning in the fight against the fraudulent binary options industry is Wealth Recovery International. With offices in New York and Tel Aviv, Wealth Recovery is a strong player in this space, having already recovered over $5 million for its clients.

An uncertain future for binary options trading

Because there is so much fraud in binary options, many consumers are best off avoiding it completely. However, there is no reason for educated, experienced investors to completely avoid binary options if they know what they are doing and work exclusively with reputable brokers and regulated exchanges.

Have you or someone you care about suffered losses from binary options? Share your story in the comments below.

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