Binary Option Investments-
Wikipedia defines binary options as high-risk financial instruments where a prediction is made regarding the price of an asset at a certain period of the day. These predictions are made in relation to small price modifications, and are therefore often difficult to make. This is what gives binary option trading a high risk factor.
However, despite the high-risk factors involved in the trade, most binary option trading companies still offer pay-out rates of as high as 65 – 85%. Here are a few reasons why these companies can afford such high pay-outs:
Losers Pay Winners
Most people who go into binary option trading don’t know much about it. Thus, they fail to do enough research before embarking on the venture. As such, most end up making more losses than gains. In fact, statistics show that 90% of binary option traders ultimately end up in the red. This means that binary option trading companies stand to make a great deal of money. Therefore, they are capable of paying huge pay-outs to the few people who manage to make the right calls.
As a matter of fact the odds are better at a casino. The house “only” has a 9.1% advantage on the $.50 slot machines and declining to a 3.9% advantage on the $100 slots. Roulette has between a 2.7% and 5.26% house advantage. And in Black Jack the house only has between a 0.20% advantage with a single deck and a 0.63% advantage with 6 decks.
Greedy Traders Ensure High Pay-Outs
Nearly every trader is greedy to an extent. Some binary option traders may start their trade with as little as 100 pounds (or dollars). And by the time this has yielded a lot of profit, the common line of action is to increase the stake. While this might not be an entirely bad course of action, most traders end up losing all the profits they have made. For example, a trader who starts with an investment of 100 pounds and has been able to make 2000 pounds as profit may now decide to invest everything at a go. The downside to this is that a poor trade can easily result in such a trader losing all the cash. This happens all the time; and this is yet another reason why binary option trading companies often end up making huge profits, and are able to afford high pay-outs.
The key in any investment is called position sizing which allows you to limit the amount you risk on any one trade to a small percentage of your total account. Proper position sizing allows you to “fight another day” if you lose all of your stake you are out of the game. So Position Sizing is perhaps more important than any other aspect of investing. An excellent book on Position Sizing is Trade Your Way to Financial Freedom by Van Tharp. In chapter 14 he covers four separate methods of position sizing that will allow you to choose the one that is best for you.
See Also:
Control Risk With Options (not Binary Options)
Trade Considerations for Option Expiration Week
“Time” – Key Factor for Options Traders
Understanding Implied Volatility
Market Patterns Repeat Themselves
Trading Psychology: Don’t Trade With Your Ego
Photo Credits: By opportplanet
