If you are approached to participate in a binary option that is outside the US market, then this could be illegal. The broker must be registered with the US to be allowed to participate, they need the backing of the regulators, too. Prosecutions do happen if this law is broken, it can result in a hefty fine for the company as well as implications for those that have participated in the activity.
The binary options that you get outside the US are relatively simple, the risks and the payments if you win or lose should be clear and easy to understand.
The options are often referred to as exotic binary options, this is due to it not being offered in the US, the most common is the high to low binary option. You must ensure that you have all the option details before placing a bid. These binary options normally have a fixed return, time and date of expiry; this information is required to make a judgement as to the position of the stake at the ending time.
If you trade correctly you could win a fixed pay-out, if you lose you lose the investment money.
If you think that the market is rising and it is going to go above the strike price at the expiry time then you will need to purchase a ‘call’. If you win you will get the pay-out. You will be aware of the amount that you would receive in pay-out along with the expiry time, the strike price and the risk before you purchase your binary option.
If you think the market is going to fall below the strike price then you would buy a ‘put’. To win with this option the market needs to be below the strike price at the expiry time.
If you are looking into binary options outside the US then it is considered standard for the strike price to be the current trading price, or, the point that a product is currently sitting at. For example; you could purchase a binary option at the current price of the S&P 500 index. The trader is offering you to speculate if the index is going to go up or down in a set period of time.
The difficulty with this type of option is you just won’t know, with any certainty, if the option is going to rise that set period of time. This is why the risk is relatively high, for investing in the binary options outside the US.
This services is offered by brokers, not on an exchange, it is vital that you are fully aware of the rules that the broker is using. These could harbour a nasty surprise, a thorough check could prevent an end result that is not in your favour. It is a great idea that you understand the brokers rules for the option if it ends on the value situated on the strike. Do you win or lose?
The broker makes their money by the difference in the amount that they pay out compared to the money that they are bringing in, from offering the different options.
The one option allowed in US
The Chicago Board Option, is one binary option that you are allowed to speculate in. It is completely regulated and above board. The great thing about the binary option, there are no trading fees, this is because you are not trading, you are really betting on the out-come of the option that the trader has chosen.