Is Trading Binary Options Gambling?
Binary options trading is a hot discussion topic anywhere in the world. There is a lot of information out there and it is difficult to make sense of it all. And the truth is that there is really false information out there and, as a result, a lot of false conclusions are drawn from it.
This article will attempt to cover all the major questions around whether or not binary options trading should be classified as gambling or trading and whether it is a legitimate financial instrument.
If you have read our recent update on binary options regulations around the world, you have probably noticed that many countries are not sure how to classify binary options. Some choose to consider it a financial instrument while others still treat it as gambling. This shows a very weak understanding of the industry by even most qualified institutions. Some seem to imply that there is only one type of binary options when in fact there are many. For instance, there are those binary options that are fully regulated, trading on the NYSE and NADEX. There is also Binary Options Exchange. where one is able to be a writer and a seller of binary options.
Gambling or financial instrument?
Let’s set one thing straight and define once and for all what is gambling. If we look up this word in Merriam-Webster dictionary which is one of the most widely used English dictionaries out there, we’ll find out that gambling is defined as “to bet on an uncertain outcome”. Isn’t trading of any kind corresponds to this definition? Well, it really depends on what you looking at. If it’s an individual trade we are looking at, then it might be. But if you are trading a system that has a positive expectancy, then there is nothing unpredictable about it – you are making money!
So maybe it’s better to take a different approach to defining what is gambling and what is a financial instrument? For that, let’s try to answer two questions:
- What are we trading? If it’s not a system that overall has a positive expectancy, then the outcome it truly unknown and we are gambling, not trading.
- How are we trading? If we are following a trading strategy that has a positive expectancy, then everything is fine. If not, then we are gambling.
Let’s now look at some examples to illustrate this:
- Slot machines in a casino. Without any doubt, this is gambling. The outcome is unknown and if you play long enough, you will surely lose. Everyone knows that the house always wins.
- Trading with a system that has a positive expectancy. This is clearly what we define “trading”, as over a period of time you are sure to make money.
- Trading stocks without a system that has a positive expectancy. Now, this is gambling. If there is no sure positive expectancy, then we are still likely to lose money over a long period of time.
Expectancy type settles the dilemma
So, coming back to the question of whether or not binary options should be considered as gambling, we have to carefully look at each category of binary options and decide whether it is possible to develop a system with an overall positive expectancy. If such a system cannot be developed, then this following up on it is gambling. However, if there is a possibility of developing a system with a positive expectancy, then this is called trading a viable financial instrument.
If you on the surface of trading using OTC (over-the-counter) binary options broker, this might be considered as gambling. On the other side is always a broker and the odds always in broker’s favor. This is because in this situation you can only a buyer here, buying a put or call option. And even if you are right, you are still to make less than what you are risking. For instance, if your broker offers 80%, you are to make only $80 on the trade where you are risking $100.
So the only way you can be sure you are trading and not gambling is to develop a system that has a positive expectancy. For this, please follow our Education series to find out more about various strategies and options types. Educating yourself and practicing is the only way you can be sure that you are trading using reliable financial instruments.
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