How do binary options brokers make money?

Binary options are a relatively new and highly straightforward way of trading short-term options through an online platform. Once the domain of wealthy investors, options trading can now be purchased by anyone with a small amount of start-up capital. The underlying concept of this new wave of short term options is based on determining whether the price of an underlying asset will be higher or lower in a given time period. Binary options traders are given the freedom to choose both the asset and the timeframe and this makes short-term options trading particularly attractive. Many traders, however, treat binary options with an element of suspicion. This perhaps stems from the relatively basic charting and bitter stories of trades expiring late in order to push the options out of the money. These claims are, of course, essentially baseless and the blame placed on the broker represents a misunderstanding of how binary options work and how the brokers make their moeny.

As with any speculation, there will be a third party providing a service at a price. Binary options is not exception and follows from traditional stock brokerages, spread betting and forex brokers who all make commission through different means of market distortion. In a perfectly efficient market, the market makers and firms providing a means to speculate on price movements for a profit would not exist. More importantly, the market itself would not exist and opportunities to gain from price movement s would be reduced to zero. With this in mind it is clear to see that all brokers gain from providing traders with the means to enter and exit markets. What is perhaps not so clear is the explanation on how this does not necessarily affect the outcome of the trade and the understanding that brokers take an aggregate, rather than individual approach to their services.

Whilst many failed binary options trades may allow the trader to rue the broker, the likelihood is that they have simply become a part of the profitable business model of the broker. This is certainly not personal and understanding how this works may even help a trade make sure that they hedge probabilities on their side whilst also enabling them to come to terms with any losses incurred. Binary options make money from simple mathematics and most reputable brokers do not manipulate the market or expiry times in order to push close trades out of the money. In a similar fashion to any successful casino a broker has their ‘edge’ buy maintaining a winning ratio slightly higher than 50%, binary options brokers provide in and out of the money payouts which provide them with a similar edge over time to ensure profitability.

There is nothing subversive or manipulative about binary options brokers. Certainly, they are developing new software and interactive trading platforms all the time to enhance users trading experience, but the plain fact is that a lot of people make the wrong decision when trading. This may be for a number of reasons beyond the simple flip-the-coin up or down decision. In fact, even if the market was a perfectly efficient market with 50% of people winning and 50% losing at any one time, the level of the payouts provided by binary options brokers (which are not divided equally) means that the 50% of losers pay more money than the 50% of winners gain. This is why even hedging a position (taking two both positions higher and lower) results in a loss. The equation for this is typically an 80% payout against a 15% return on a losing position, leaving 5% to the broker.

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