Binary Options and their Legal Status

Binary Options

Thanks to digitization, the trading with exchange market assets as well as with derivatives has become a lot less complicated and time-consuming. This may be one of the reasons why trading has become so popular among investors worldwide. Also, the great impact of cryptocurrencies on the exchange market has led to a shift in investor behavior and appetite for risk.

While many investors choose to invest their funds directly in market assets, others prefer indirect investments. ETFs and derivatives are possibly the most popular instruments for those, who are not willing to purchase any exchange market values but still want to benefit from their fluctuation. In this article, we want to talk about one of the most controversial types of derivatives, the exotic options called binary options.

What Are Binary Options?

Options are contracts agreed on by at least two parties. They entitle the buyer to buy or sell a specific underlying asset for a stated price within a certain time span. The owner is usually not obligated to buy or sell, though. When signing up for an option, the investor makes a prediction on how the underlying asset will perform. Options can be leveraged. By paying a proportional margin, the buyer can inflate the available funds and therefore step into the option with a higher amount of money. In consequence, the potential profits are subject to a leverage effect and turn out proportionally higher than the originally available investment. That makes options trading very popular, of course.

Binary options are an exotic type of both options and derivatives. They are also called digital options and all-or-nothing options. All their designations give us a basic idea of how binary options work:

Instead of making a clear prediction on the asset value, investors basically only answer an easy yes-or-no question. Will the market value be above a certain price on the expiration date of the option or not? If investors assume that it will be, they buy. If they assume that the asset will move downward and fall below the stated price, they sell. Due to this simple yes-or-no question, binary options are comprehensible yet risky types of investment.  The buyer can either close the option with a plus or the option turns valueless.

Are Binary Options Legal?

As mentioned before, binary options are a very controversial financial instrument, which is due to their high attractiveness for venturesome investors. As many options go valueless, the market is very liquid and scammers sense their chance to bamboozle inexperienced investors.

That’s why investors have been subject to fraudulent activity on many occasions. Some countries have therefore decided to prohibit binary options trading. Within the United States it is legal to trade them, but investors should make sure to only work with a regulated U.S. exchange. A regulated market creates a safe haven for investors, but it is crucial to trade using legit brokers like this one: In a recent test, Binomo was ruled as “not scam”, which means that the binary options broker is safe to invest with.

Binary Options and Their Legal Status Around the World

Some nations have decided that the fraud risk going out from binary options is so high that regulatory instruments do not suffice to prevent scam. Canada is probably the most well-known example of a nation, where binary options are banned completely.

Mexico, Russia, Belarus, Moldova and Ukraine don´t have specific regulations, but allow trading for regulated firms. In the European Union and within the United States, it is possible to trade on regulated markets with or without restrictions.

Why Is the Binary Option Market Regulated?

The main reason for the strict rules that many jurisdictions have elaborated for trading with binary options is the high risk of fraud. Some nations even deem all-or-nothing options gambling. Hence, the market needs to be strictly regulated or even banned in countries, where gambling is a legal grey zone or even illegal.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.