What is a binary option?

Binary options are financial instruments that simplify the trading of an underlying asset or market by turning trading into a bet-like experience. Basically, to a YES/NO question.

For example, you have to guess/bet on whether the price of an underlying will be over or under a certain strike price after a certain time. If you think it'll be over, you'd pick YES - i.e., you pick "buy". If you think the underlying asset or market will not meet the strike price, you'd pick NO - "sell" in this sense. For the most part, users can bet on forex, stock indices or commodities. These options are priced between $0 and $100.

The expiration dates of a bet vary from minutes to weeks, it depends on the trader.

As you see, this is a speculative game - you only speculate on the price movements, but don't actually own anything. Trading is not that easy so that it can be narrowed down to a simple question of whether an asset will be over or above a certain price at a certain time.

In the United States, trading binary options is legal and regulated by the Commodity Futures Trading Commission (CFTC).

In the European Union, it is outright banned by either local regulators (like the UK's Financial Conduct Authority) or the European Securities and Market Authority (ESMA).

Binary options are also banned in Australia by the Australian Securities and Investments Commission (ASIC).

The Commodity Futures Trading Commission is a US government agency that oversees most derivatives markets in the US and is responsible for protecting market participants from fraud, scam or manipulation.

Safety is a key concern when it comes to all investments, especially binary options.

How safe are binary options?

The problem is that risk assessment or risk management is more or less impossible with binary options. This is due to the fact that you are effectively betting on movement that may or may not be manipulated or fraudulent on a platform for a certain timeframe. Therefore, traders can't manage their positions.

To expand on all aspects Sam Dogen from Financial Samurai has also provided us with some insights about:

• the purpose of binary options

• what the alternatives for binary options are

What is the purpose of binary options? Isn't it close to gambling?

“Binary options offer a viable alternative when speculating or hedging, but only if the trader fully understands the two potential and opposing outcomes. If you don't understand binary options, I wouldn't trade them. And if you are to invest in binary options, start small.”

What are good, safer alternatives to binary options?

“A safer alternative to binary options is investing in a plain vanilla structured note, with downside protection and upside participation. But my favorite is investing in real assets, like real estate crowdfunding because it is less volatile, holds its value better, and generates income.”