I haven't yet heard about a "binary options bubble" but I have a friend who likes to dabble in the stock market. He calls himself a "small investor" but his success has been up and down. He has a couple of stories about how he bought some stocks on the cheap and sold his shares for 2-3 times what he paid for them but most of his money is tied up in mutual funds.
Other than managing my 401(k) plan I can't say I have much experience in the stock market but Jerry keeps telling me I need to put some money into binary options. And I'm like, "Dude, WTF?" What exactly are binary options? Investopedia says you'll either make money or you won't on a binary option, hence the "binary" part of the name. But some Websites say you will be paid on binary options regardless of what happens.
The return on binary options may not be all that good and so people do lose money on them. Maybe they lose a LOT of money. But so many people are crazy for the binary options market right now it's hard to ferret out the hype from all the facts. I'm not sure but I think the securities that went bust in the 2008 mortgage crisis were binary options or something like them. Binary options are derivative contracts which means when you buy an option you're not actually buying the underlying security. It's an option to buy the security later (or to sell it).
That's what makes this all so funky and scary. Back in 2010 a writer at Forbes warned investors away from binary options but from what it sounds like today I don't think many people listened to him. And in the past four years there hasn't exactly been a meltdown in the binary options markets so maybe he was premature. But you still have to wonder why people don't want to jump on the binary options bandwagon.
There are stories about shady companies that sell options illegally so you definitely want to find a reputable broker. My friend Jerry reads review Websites when he thinks about changing brokers. I don't know how many he uses but he says you should always look for the best binary option broker on multiple sites because you have to compare them carefully.
Now here is the really scary thing about all this. This past weekend I decided I would look into the binary options market by doing a little research. I figured that there must be some academic studies out there which tell you how effective the binary options investing strategy is. Or strategies, I should say. I guess you can buy up or down, sideways, backways, and other ways I don't get.
And I found some research. There are papers like "Dissecting Option Prices using Closed-Form Series Expansion with an Empirical Study of Variance Risk Premia" (that's a .PDF file) and "A Study on the Binary Option Model and Its Pricing" (another .PDF). And I have no idea of what these guys are saying. Is it safe to invest in binary options or are you just wasting your time and money?
In my book when you don't understand the language you don't need to be involved in the conversation. Sorry, Jerry, but I'm not ready to take that plunge just yet. So yes I am a little scared of getting into that market but I think you have to really know what you are doing. Good luck with that.
