There has been a lot of chatter on binary options with naysayers comparing it to gambling. The question whether binary options trading is similar to gambling has no definite answer bat falls in a gray area. Before inception of binary options, most institutional and individual traders relied on physical exchanges to trade traditional forex, stocks, indices and commodities. However, it all changed when binary options were born which provided a simple and yet convenient way to trade financial securities. Owing to the simplicity and profitability of trading binary options, they can be easily be mistaken to be a form of gambling. Well, let’s consider a case study of real estate investors. They buy property with an aim of selling at a profit at a later date. They don’t buy a house to sell tomorrow or even the following week. They have to hold on to the property for a couple of years only to about 10% in profits. On the other hand, binary options trading allow a trader to earn up to 90% on a single trade which can be as short as a few seconds. To clear the air once and for all, we have prepared an article comparing binary options trading to gambling, highlighting their similarities as well as differences.
Differences between binary options and gambling
Binary options are financial contracts with which a trader has the right but not the obligation to exercise an option. Binary options are all or nothing contracts. You either win a hefty payout or lose the invested funds. There is no fence sitting.
On the other hand, according to Wikipedia, Gambling is the wagering of money or something of value on an event with an uncertain outcome with the primary intent of winning money or material goods. Therefore, gambling is any “chance-driven” activity which involves a wager and a prize.
Influence on outcomes
In binary options trading, there can only be two outcomes; a trade can either end in the money or out of the money. An outcome in binary options trading is determined by comparing the expiry price to the starting price. Meaning, in binary options trading or any other form of financial trading, outcome of a trade is subject to the prevailing market conditions. A financial trading outcome is devoid of interference from the participating parties and can either be positive or negative. A binary options broker can’t in any way influence an outcome of a trade. For example, if the prevailing market price of the underlying asset is on an uptrend as initially predicted, a binary options broker does not have powers to change the direction of the trade.
On the flipside, in gambling, the number of outcomes is dependent on the even taking place. For instance, in an event such as a dog race with 10 dogs, there are 10 likely outcomes; any horse can win provided that the race is not rigged. In addition, gambling, especially casino gambling is prone to outcome manipulation. Most casino personnel may manipulate results just to create the notion that the patron is winning some bets.
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In binary options trading, risks are defined. In fact, a trader can analyze risks before initiating a trade. Meaning, a trader has complete control over risk factors and he/she has to decide whether to proceed with a given trade after risk assessment. For instance, if a trader finds that risks facing a potential trading opportunity are higher than the expected returns, the trader can forgo the trading opportunity for a more lucrative one. In addition, binary options trading risks can be mitigated by careful analysis of the underlying asset.
On the contrary, risk is not defined in casino gambling. A player has little or no control on risks facing a bet. For instance, in a game of blackjack, it always boils down to luck for a player has no way of knowing the next card in a well shuffled deck; unless he/she is proficient in card counting. Risks in gambling are open to control by outside factors which can’t be controlled by a player. Obviously, the undefined risks make gambling uncertain and in most cases, it results to a string of unexpected losses.
Another distinct similarity between gambling and binary options trading is contract durations. In binary options trading, the length of a trading duration is defined right from the onset. The length of a trade in this case can be as short as a few seconds or as long as a couple of months. A trading contract is terminated when the expiry duration is reached unless a trader uses special trading tools to lengthen or shorten the trading duration. The length of contract duration in a binary options trading is also known as the expiry duration. Gambling on the other hand does not necessarily operate within the confines of time with the exception of sport betting. In a game such as gambling, a player can keep playing until the casino is closed or he/she is exhausted.
In binary options trading, some brokers offer refunds for “out of the money” outcomes. Usually, refunds range between 0 to 15%.Also, most binary options brokers offer a plethora of trading tools aimed at securing trader’s investment. For instance, the rollover trading tool allows a trader to extend the length of a trading duration for a losing trade while the close early feature allows a trader to sell his trading position before the trading contract expires for a winning trade. However, in gambling, there is nothing of the sort. A player stands to lose the wagered amount in full if the event(s) does not go his way.
Although there is a lot of chatter equating binary options to gambling, the two are not alike. Gambling is purely dependent on luck while winning in binary options trading can be is dependent on analysis skills. That being said, you can always improve your winning rate by improving your analysis skills or buying premium signals.