Binary Options - Gaining traction

UncleKevin's picture
Rank: Gorilla | 677

Binary options are gaining traction with retail brokers. The product is easy for the average Joe to understand. Has anyone seen these sites? Are they even legal? I imagine a security based on publicly traded stock must be governed by the SEC?

http://www.startoptions.com/options/ http://www.anyoption.com/jsp/index.jsf?s=2&gclid=C...

The site works by you selecting if the price in exactly one hour will be above or below the current price.

They are really a rip off. The pricing is really bad. Payouts are around 70%, for both a bear or bull trade. Obviously in a perfectly fair market without transaction costs there should be offsetting payouts on either end. i.e. if payout for above a given price is 70% return then the payout below the price should be 130%. The sites are acting as the market maker I guess, and making killing.

The other ethical issue is they advertise "make 70% in an hour!" but they forget to mention "lose 100% in an hour."

Comments (80)

May 12, 2010

Wow, I never saw this before. Crazy. I have no idea, FX makes sense because its unregulated, but I would figure the equity based options would be regulated by SEC and commodities by CFTC... anyone know what's up with this?

May 12, 2010

Couple of things

1) this is a beautiful scam. They give u a 70% return if ur right and 10% "refund" if ur wrong.
in other words, a 70% return for a correct guess and 90% loss for a wrong outcome.
You can do a nice little simulation in excel. In about 10-20 trades, the poor sucker is always at $ On a $1000 investment lol.

(here try it, pretty cool)

Instructions:

1) Enter 1000 into Cell A1
2) Enter this formula into cell B2
=ROUND(RAND(),0)

2)Enter this formula into cell A2:
=IF(B2=0,A1(0.1),A11.7)

3) Copy Cell A2 and B2 down till about A20 and B20
Here are some results:

1000
1700 1
2890 1
289 0
28.9 0
49.13 1
83.521 1
141.9857 1
241.37569 1
24.137569 0
2.4137569 0
4.10338673 1
6.975757441 1
11.85878765 1
20.159939 1
2.0159939 0
0.20159939 0

I was down to $0.20 in about 17 trades lmao!!!

May 12, 2010
creditderivatives:

Couple of things

1) this is a beautiful scam. They give u a 70% return if ur right and 10% "refund" if ur wrong.
in other words, a 70% return for a correct guess and 90% loss for a wrong outcome.
You can do a nice little simulation in excel. In about 10-20 trades, the poor sucker is always at $ On a $1000 investment lol.

(here try it, pretty cool)

Instructions:

1) Enter 1000 into Cell A1
2) Enter this formula into cell B2
=ROUND(RAND(),0)

2)Enter this formula into cell A2:
=IF(B2=0,A1(0.1),A11.7)

3) Copy Cell A2 and B2 down till about A20 and B20
Here are some results:

1000
1700 1
2890 1
289 0
28.9 0
49.13 1
83.521 1
141.9857 1
241.37569 1
24.137569 0
2.4137569 0
4.10338673 1
6.975757441 1
11.85878765 1
20.159939 1
2.0159939 0
0.20159939 0

I was down to $0.20 in about 17 trades lmao!!!

Again I agree this is an attempt at a scam, but assuming that stock A's motion is purely Brownian is inherently flawed. There's not normal distribution is stock price in hour trading, and it surely doesn't diffuse about a discrete one dimensional lattice as you have modeled.

Likewise, if you buy a binary in the morning, let's say this morning, for MS to be down by 10:30 AM you would have been right.

Any idiot would have known MS would be down steep in the morning with the accusations that hit the news shelves last night regardless of how it would finish by 4. Regardless of the price of the contract, your risk exposure is extremely low since it's a binary contract; almost like stacking the deck in gambling.

It makes the valuation completely non-diffusive and contradicts the Excel routine.

I'm not trying to be preachy I just think finance gets a bad enough wrap for over simplifying this kind of stuff. The routine is completely irrelevant to valuing these binaries, though a good way to show that it may likely be a scam.

Someone smarter than these idiots could actually make a killing off these contracts, and I bet there is some HF out there that does so. I guarantee you their valuation model is ridiculously predictable and fundamentally wrong.

Feb 18, 2020

Most of these financial derivatives are priced based on the old textbooks theories, in which the authors try to simlify problems by throwing away all the limitations in reality. I've seen more and more people being not comfortable with these nonsenses anymore.

May 12, 2010

I don't argue that this is a losing proposition but does your excel calculation account for the fact that some people may have reason to believe that they are more than 50% likely to be right? Albeit, not much over 50% given what can happen over a one hour time frame. What if market makers start using these trades and then dump huge blocks on the market to drive the price down? There must be a maximum bet size.

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May 12, 2010
cheese86:

I don't argue that this is a losing proposition but does your excel calculation account for the fact that some people may have reason to believe that they are more than 50% likely to be right?

For the scenario creditderivates gave (70% return, 10% refund), you actually have to be right more than 56.25% of the time. If you're a trader for a BB or HF, wouldn't you be right more than that usually?

May 12, 2010

Keep in mind that (as far as I can tell) these are daily... so you not only have to be right about direction, but about the direction within 6-8 hours max.

May 12, 2010

The key is time frame, I've never seen hedge fund clients use digitals for a few hours, much less At-The-Money digitals expiring in a few hours.

Most frequently, you'll see digitals employed for 2-week to 3-month time frames, further out of the money, because then our sell-side desk can harp on the fact that the purchaser can obtain a payout 8.5 times the cost (based on the parameters).

So no, I can safely argue that hedge funds do not use digitals to bet on being right in a few hours, digitals are ill-advised for such a short horizon.

unqwertyfied, it doesn't quite work like that.

Example:
70% profit on wins
90% loss on losses

Here's a simulation where i was right 4 times out of 5 (80% correct) and still lost money:

Start with $1000.

First trade: Win----------Balance: $1700
Second trade: Loss----Balance: $170
Third Trade: Win--------Balance: $289
Fourth Trade: Win------Balance: $491.3
Fifth Trade: Win---------Balance: $835.21

Jan 24, 2012
creditderivatives:

The key is time frame, I've never seen hedge fund clients use digitals for a few hours, much less At-The-Money digitals expiring in a few hours.

Most frequently, you'll see digitals employed for 2-week to 3-month time frames, further out of the money, because then our sell-side desk can harp on the fact that the purchaser can obtain a payout 8.5 times the cost (based on the parameters).

So no, I can safely argue that hedge funds do not use digitals to bet on being right in a few hours, digitals are ill-advised for such a short horizon.

unqwertyfied, it doesn't quite work like that.

Example:
70% profit on wins
90% loss on losses

Here's a simulation where i was right 4 times out of 5 (80% correct) and still lost money:

Start with $1000.

First trade: Win----------Balance: $1700
Second trade: Loss----Balance: $170
Third Trade: Win--------Balance: $289
Fourth Trade: Win------Balance: $491.3
Fifth Trade: Win---------Balance: $835.21

ATM binaries expiring in an hour = a great way to get whiplash.

I'd love to listen to somebody with no actual experience explain to me how easy it is to delta hedge such a thing...

May 12, 2010

Revsly, lol can u stop beating me to the punch??

But yeah the key is definitely time frame! And given the payout conditions, you have to be right well in excess of 80% of the time to be right in this particular scam

May 12, 2010
creditderivatives:

Revsly, lol can u stop beating me to the punch??

But yeah the key is definitely time frame! And given the payout conditions, you have to be right well in excess of 80% of the time to be right in this particular scam

Haha sorry man, at least we are in agreement!

Another thing to keep in mind is bankroll. Sure the associated win probability with an expected value of zero might be 56% (I'm assuming you calculated it correctly), but since the individual investor likely has a small or at least rather limited funding, the actual probability you'd have to be correct is much higher.

May 12, 2010

Cheese86, that is a concern even without this scam. On any exotics desk, there is always concern that after a hedge fund enters into a barrier exotic (such as this), there is a fear that they may attempt to go into the market and smash the bid to trigger the option in their favour, Revsly can probably testify to this.

It's really quite cool, you'll see market makers and hedge funds battling in the market place in defense or attack of a given barrier. (just ask the traders who are heavily short volgamma/vanna)

And no, as i indicated above, under these circumstances, you have to be right much much more than 50% time, just to break even. Approaching 90%. And remember when you try to move a price in your favour that often, and given the size needed to do that, other players can burn you quite easily.

Not to mention the cost of pushing a price (because in this case, you are acting as market taker, not market maker)

May 12, 2010

Yeah, unqwertyfied is off a bit in his calculation. I'm running it too and I'm generating a histogram here. I can't even break even when I've been right 85% of the time.... it's awful!

But just looking at it would tell you: in your head, change the 90% loss to 99% loss and you realize that ANYTIME you are wrong, you're essentially bankrupt. All gains you ever made were wiped out.

One must be correct near 90% of the time to break even in this case

May 12, 2010
FXTrader:

Yeah, unqwertyfied is off a bit in his calculation. I'm running it too and I'm generating a histogram here. I can't even break even when I've been right 85% of the time.... it's awful!

But just looking at it would tell you: in your head, change the 90% loss to 99% loss and you realize that ANYTIME you are wrong, you're essentially bankrupt. All gains you ever made were wiped out.

One must be correct near 90% of the time to break even in this case

The reason you're losing so much is because this program reinvests the whole sum back in a binary option.

Assuming you lose even once, you would need to win the next 4.34 times to break even.

May 12, 2010

Ah, fair enough. I was assuming that all bets were the roughly the same size (probably not a good assumption I realized), and so calculated % hit-rate to break even {0.7x + 0.9(1-x) = 0}.

This almost seems like blackjack with a large rake and small refund to keep you coming back...haha

May 12, 2010
unqwertyfied:

Ah, fair enough. I was assuming that all bets were the roughly the same size (probably not a good assumption I realized), and so calculated % hit-rate to break even {0.7x + 0.9(1-x) = 0}.

This almost seems like blackjack with a large rake and small refund to keep you coming back...haha

Agreed, and like at a Casino, its limited equity vs relatively unlimited. Survival is not likely for the player.

May 12, 2010

Keep in mind max account open is $5000, max bet size is $500 and min is $30. So once equity dips below $30 you're done. I've been playing around with it a little.

May 12, 2010

not to defend this stuff, but the simulations you guys are building are biased...you assume that the investor (gambler) only has as much money they wagered the first time and will always wager the entire amount they have...

May 12, 2010

Yup, I did that just to provide some uniformity, but the reailty is even if you TRY to pocket the earnings and only reinvest principle, the same problem arises:

So Average Joe says he's only ever gonna use $500 of the account balance:

Account Balance: $1000

1st Trade: $500---Win: $Account Balance: $1350
2nd Trade: $500--Win; $Account Balance: $1700
3rd Trade: $500--Win; $Account Balance: $2050
4th Trade: $500--Loss; $Account Balance: $1600
5th Trade: $500---Loss; $Account Balance: $1150
6th Trade: $500---Win; $Account Balance: $1400
7th Trade: $500---Loss; $Account Balance: $950
8th Trade: $500---Loss; $Account Balance: $500
9th Trade: $500---Win; $Account Balance: $850
10th Trade: $500---Loss; $Account Balance: $400

At this point, we run into the problem where u have to start making smaller trades...(i.e. invest the entire principle).
You can see where this is going.

General conclusion, no matter how you break up the invested principle versus the entire balance, the conditions of this particular digital option force the user into bankruptcy.

It won't be long before an average investor runs into this problem.

I'm running it over and over changing various parameters
-constant principle
-increase principle after a win/decrease after a loss; vice versa

The win ratio changes depending on how you adjust it, but the overall result is the same, for THIS kind of time frame, no one in their right mind would dare trade these digitals

May 12, 2010

just ran a simulation for 20 bets (10k iters) and you get an expected loss of about $200...i think that makes more sense

May 12, 2010

FXTrader--I agree with your points...I was really commenting on the person who said you need an 80% chance of being right...if you gave me a 60% chance of being right I'm pretty sure I'd happily make these bets.

May 12, 2010

CD was talking about 80% of the time if you invest the entire principal each time, which is completely accurate.

And as for being right 60% of the time, theoretically you'd have to know how you were going to structure your principle. In other words , on which bet would you risk $500 or more, or less.

The problem is two or more straight losses (depending on your structure) can force you into a situation that wipes you out.

Dec 13, 2014
FXTrader:

CD was talking about 80% of the time if you invest the entire principal each time, which is completely accurate.

And as for being right 60% of the time, theoretically you'd have to know how you were going to structure your principle. In other words , on which bet would you risk $500 or more, or less.

The problem is two or more straight losses (depending on your structure) can force you into a situation that wipes you out.

You're looking at this wrong.
You're calculating probability of coming out ahead. Expected value is much more relevant.

Array

May 12, 2010

So I created a kind of complicated test, Starting account size of $5000, would bet $500 if account equity available, if not $100, if not $30. I ran it through 10000 trades, with 60 simulations of this. I then calculated number of defaults (account blowups) and expected value. Sticky area is about 58-61% as far as I can tell.

If anyone wants to see it feel free to PM.

May 12, 2010

Just to provide some perspective on how badly these are priced, here's how my desk would price the following vs. how these guys would:

Scenario

Stock: $100
Expiry: 8 hours
Volatility: 20%
Notional: $1000

Desk:
Premium ( % bid/ask): 49.15%/50.95%

These Guys:

Premium (% bid/ask): 41.2%/58.8%

The problem is clear.

breakinginnew, your 60% chances would just put you over the top (marginal profit) given their estimated bid/ask.

The only thing we have to factor in is that the investor has "limited capital" so the permutations, or order of
occurrence is of great importance (what FXTrader was getting at, too many losses in a row)

CD~

May 12, 2010

Revsly, that makes perfect sense, given that my estimated offer price for the trade is 58.8%

lol nice!

(send the simulation on)

May 12, 2010

http://www.mediafire.com/file/kji4iygt0mw/Binary%2...
It's kind of big because of all the rand()... so its slow sorry!

My estimation of 58-61% was pretty unscientific. Educated guess looking at the profile after refreshing a bunch of times. Pretty cool that it lines up though! I think most of it should be correct, I did it rather quickly though, so not sure. Either way, it just goes to show the power of simulations, even if they are pretty rough!

May 12, 2010

To be fair, the expected value doesn't really make much sense now that I think about it, since it will be correlated with time. So I'd largely ignore that.

Perhaps it could be spread over a per trade basis.

May 12, 2010

Yeah, furthermore, the fact that you sometimes default, skews your expected value. Unless you took account for that and kept calculating as they dug themselves deeper and deeper in "debt".

Edit: and i realize you didn't, if i put in 15% probability, the E.V is the same as like 50% lol

In the end we all agree that to win in that particular trade long term..... u've got to beat a literal coin-flip a hell of a lot more than is theoretically possible

May 12, 2010

The problem with binary options is they're almost impossible for a market maker to hedge. Near the money binary options close to expiration will experience discrete price movement for an aribtrarily small move in the underlying. The delta changes almost infinitely quickly in these situations.

May 12, 2010

lol it's not that "big" of a problem, except when expiry approaches. As you described, Volgamma and vanna certainly become headaches.
But other than that, we love doing these trades because it's quite easy to overcharge and hedge effectively, especially in the FX space

May 12, 2010
creditderivatives:

lol it's not that "big" of a problem, except when expiry approaches. As you described, Volgamma and vanna certainly become headaches.
But other than that, we love doing these trades because it's quite easy to overcharge and hedge effectively, especially in the FX space

Yup, if you want to hedge you can run a spread and move the strikes so the upper is at the binary's exercise (overhedge). Between that and the spread you collect over TV, they are nice.

May 12, 2010

First things first, this is exactly why digital options are extremely illiquid on single name equities. What time this morning would you have tried to get a digital on MS, 7,8:30,9am?.... what price would they have used as the "current price", certainly not yesterday's close given the news. We wouldn't have made you a market at that time,. Howeer, if you came to me at 9:30am, then I'd make you a market and by 10:30am, MS had ticked up quite a few bps... you would've lost if you bet on a drop.

So, for these guys, I guarantee you they are only making markets on these digitals DURING market hours, to avoid "any idiot" being able to arb them like that.

Risk exposure being "low" on a digital is a relative term. If i have $1000 and i put all of it into a standard binary contract and I'm wrong? You lose the entire premium. Sure my risk was "limited", but it's still everything I had. So I hope that is clear. You'd be a good salesman though, you might convince some sucker that digitals are low risk propositions. We could use a guy like you.

I'll answer the other part in a bit, but there is nothing , absolutely nothing complex about pricing a digital. It's probably one of the quickest things we can price. (no knockouts, no triggers, nothing... very simple and its ok to simplify these products)

CD~

May 13, 2010

Well, this gives me something else to do with a quick 500 if I can't make it out to an indian casino due to work.

Still not sure if I want to spend the next 30+ years grinding away in corporate finance and the WSO dream chase or look to have enough passive income to live simply and work minimally.

May 13, 2010

Wouldn't these be exploitable if a hedge fund knows that are about to dump big blocks of a selected stock?

May 13, 2010
balbasur:

Wouldn't these be exploitable if a hedge fund knows that are about to dump big blocks of a selected stock?

Remember the max bet is $500. For $500, is it really worth the time?

May 13, 2010
IlliniProgrammer:
balbasur:

Wouldn't these be exploitable if a hedge fund knows that are about to dump big blocks of a selected stock?

Remember the max bet is $500. For $500, is it really worth the time?

And the max account size is 5000, so it would make zero sense.

May 13, 2010

Anyone want to touch on the legality of those sites?

creditderivs, "There's not normal distribution is stock price in hour trading" - this may be true, but wouldn't you agree that there is a 50:50 shot of that stock going up or down in an hour? If you can call these things considerably more than that than you must kill it on the street. Or is that too much EMH?

May 13, 2010
BCbanker:

Anyone want to touch on the legality of those sites?

creditderivs, "There's not normal distribution is stock price in hour trading" - this may be true, but wouldn't you agree that there is a 50:50 shot of that stock going up or down in an hour? If you can call these things considerably more than that than you must kill it on the street. Or is that too much EMH?

I'm just a quant, but in the absence of a highly opinionated trader, I'll take a stab at this.

That's not necessarily true. The market is supposed to be semi-strong form efficient to people who aren't traders. That said, the stock market can still be perfectly efficient if the stock has a 20% chance of going down $10 and an 80% chance of going up $2.50 in the next hour. In the shorter-term, stock prices aren't always normally distributed; you might not be able to make money off of trading stocks on the technicals, but that doesn't necessarily mean you can't look at a stock and say that it has a higher than average probability of going up (even if it has a more severe downside than upside.)

May 13, 2010
BCbanker:

Anyone want to touch on the legality of those sites?

creditderivs, "There's not normal distribution is stock price in hour trading" - this may be true, but wouldn't you agree that there is a 50:50 shot of that stock going up or down in an hour? If you can call these things considerably more than that than you must kill it on the street. Or is that too much EMH?

Not a 50:50 shot at all, it's completely Chaotic, there's a million different things controlling the price of that stock. Remember Chaotic motion and Brownian Motion are entirely different things.

In a black box, yes, it is either above or below the current price, which implies 50:50 but thats not the case. Looking at the Level I and Level II spreads makes it pretty clear where the stock is going to be in an hour, throwing basic stats out the window.

Using something you'd learn in Statistics 101 is not going to help you make money in these kinds of contracts, they are way more complex, remember the other principal of statistics 101: less time = more uncertainty.

If you're stupid enough to chance $500 bucks on this shit trade off news and Level Is and IIs on your PA.

Best Response
May 13, 2010

Acknowledgements first:

IlliniProgrammer hit the nail on the head when he said: "but that doesn't necessarily mean you can't look at a stock and say that it has a higher than average probability of going up (even if it has a more severe downside than upside.)"

This is why I reiterate, no hedge fund is going to trade hour-long digital options.
I've seen this question above: "wouldnt a hedge fund trade digitals, then try to slam the stock or push it up?"

My answer was a resounding yes. But I added, while hedge funds may aim to push a price in one direction, the sell-side desk will defend the price level with equal aggression. Otherwise this would be a heavily profitable strategy and the hedge fund would seldom lose.

As for these retail digital options dealers, I doubt they have the wherewithal to prevent such an aggressive move and thus a hedge fund could easily take advantage of them.

BUT here's the trade-off. Hedge funds would realized that these things are so badly priced against the investor, it's probably not worth it to pay the cost required to move a stock, simply to spite these guys.

BCBanker, yes that was my point, its essentially a coin-toss within an hour. If you can call a 4-hour move greater than 50%(+spread) of the time, then yes, a regular digital options trade (with a real desk) is your best bet because you can make money long-term. The problem is if you convert the conditions listed in this retail deal, to a standard digital option, you realize that you actually need to be right just above 60% of the time (given that you pick the right principal value, i.e not your entire balance).

Summarized, these are the general points i was trying to make:

1)Betting on an At-the-money digital expiring in a few hours is in effect a coin-toss

2)As IlliniProgrammer said, hedge funds dont normally look at a stock and say it has higher than average probability of going up; still a coin-toss in their opinion....

3)Hedge funds realize it's fool-hardy to bet on a coin-toss in a few hours, not to mention, the cost required to move the stock in their favour may outweigh the benefit. Thus, they trade digital options with at least a 2 week time frame

4) The mispricing on these retail products is so awful, hedge funds would just go to an institutional desk where they get a better price anyway because that makes more sense than trying to spite some scam retail artist

Any questions please ask. It's great that we're discussing this

CD~

    • 4
May 13, 2010

PM me for questions you dont want to bombard the forum with

May 13, 2010

Good on you, CD. That was well-expressed.

May 13, 2010

Thanks for posting this. The way in which you have all analysed this as an investment opportunity is very interesting, especially as I've never really looked into Binaries. Just goes to show how more I have to learn before this summer!

May 13, 2010

this is a test

May 14, 2010

Just saying, this thread kicks the shit out of just about anything I've seen on WSO in the last like 3 months.

"I just want to be a monkey of average intelligence who wears a suit. I'll go to business school!"

May 14, 2010

mctrader, I'm not clear on your conclusion. Are you saying that different demand at different price levels can show you which direction the stock is going in the next hour? Do you think you could profit from the binary 1 hour trade?

May 14, 2010

I think you can out play these guys, yes.

I just don't think the upside justifies the play, and I wouldn't advise anyone to go for it, because you have to really pick one or two stocks each day that you are sure will be up or down at x-time due to something happening off the exchange, and study their inter-day trading before placing a bet, don't do it at 9:30 when the markets open.

Any option for greater than 2 hours is a different story and I wouldn't play that game. If you've spent enough time as a market maker observing how the Quote systems tell you where a stock is going to be in 30 minutes to an hour you can play this game and probably clean a profit.

Everyone was quick to jump on this as an impossible game and a scam, but you can't over simplify a derivative contract with one-dimensional Brownian motion and expectation value; stock price, ESPECIALLY given how volatile the market is today, is not that simple and never will be.

That's why all the Math and Physics PhDs are in a few places (Ren Tech, Optiver, Citadel, Shaw), and those places are making the most money. We don't simplify pure math for aesthetics, and we don't jump to conclusions using processes learned in our Undergraduate Freshman courses.

Wall st. needs a serious quantitative make over, or we can only expect more poorly valued derivatives and over simplified algorithms that will loose someone TONS of money in the long run.

If any of you still in college have the chance, pick up a Math minor and get to know your professors. Talk to them about how crazy they think it is that people are using math to do things like was done in this thread, it'll really change your perceptions of Quant. Finance.

If any one wants to chat more about Math or Physics feel free to PM me, I'd be more than willing to talk to you about both fields and answer any questions you may have about my posts on this thread.

    • 1
May 14, 2010

//www.wallstreetoasis.com/forums/summer-analyst-season

M.C.Trader on May 6th, 2010

"I've got a good question, and hopefully some of you have experienced this:
I'm a grade ahead and as a rising senior will only be 20 all summer. What do I do when it comes to to "go have a drink" I mean obviously I drink, and obviously everyone around me drank in college or high school before they were 21, but what if I get shut out of a bar, get carded, etc, etc. Is it better to not go out, to get a fake ID, or.....grow out my beard and where a hat and sun glasses and a trench coat.
F me in the A
Any advice?"

M.C.Trader, before you continue speaking as if an expert on the matter, I suggest you explain which desks you've worked on, in your awesome career thus far as a 20 year old who still has a year left in college.

There are three of us on this thread who have all worked on FX Exotics/Equity Derivatives desks (some of us are returning as fulltime analysts/associates). I just think it only makes sense that before people approach you for further discussion, you qualify it for them.

I mean I'll be upfront, everyone knows Revsly works at Credit Suisse, CreditDerivatives at Morgan Stanley and I'm at Deutsche Bank. So please, come clean.

May 14, 2010

I've never sat on a desk, I never said that I did. All I do right now is research, and this is what my research has been in.

I'm not the only person out there who feels the same way, and most academics will say the same things that I have, even the ones that teach Quant Finance at big schools.

Miami has one of the best undergrad Physics departments in the country, we wrote the book on computational physics (literally), I'm doing numerical research in Brownian Motion, fractal randomness, diffusive systems, and DLA clusters with the Physics and Math departments. I'll be interning this summer at a MM.

I really stand by what I said from a pure mathematical stand point, and I'd be more than happy to chat with all of you guys about it.

I may find this summer that I don't even like finance and just get a pure PhD in Math and Teach.

Again, if you wanna chat PM me I'd be more than happy to share with you some of my research and debate all this, but it's off topic for this thread. And I do encourage everyone in college to take the path I did and get into the hard sciences and Math before they get into Finance.

I think Wall St. would benefit from having more people out there who understand the stuff, and that's not to say that either of your three don't, I don't know anything about you guys.

That's my story, and I've never lead anyone to believe anything else, if I did it was maybe because I do actually know what I'm talking about. You don't have to be a trader to know these things, academics probably no more than Traders ever will; hence my reference to the above firms and how they are filled with academics and people with backgrounds like myself and are making tons of money.

May 14, 2010

I'd be happy to read some of your research, send it along. I'll save commenting until I have an idea of what you're talking about.

To be fair though, all of our banks are stocked with Math, Physics, Statistics, etc PHDs, so I don't think that's much of an issue.

May 14, 2010
Revsly:

I'd be happy to read some of your research, send it along. I'll save commenting until I have an idea of what you're talking about.

To be fair though, all of our banks are stocked with Math, Physics, Statistics, etc PHDs, so I don't think that's much of an issue.

I agree, I know there are, but there is this perception out there that those people are told by their MDs to make models 'look' a certain way, whether that's the case or not I have no idea, but that is the stigma that firms have gotten.

When I get back to schools next year I'll be trying to get published a couple of times, so hopefully I can get my stuff out there, I'd be happy to send you some of my stuff now.

Apologies if anyone felt accosted, I'm still a bit indoctrinated having been only on the Math/Physics side of things where I'm told that this stuff is "black magic" day in and day out; I'm sure that I'll see that change after working this summer.

May 14, 2010

Good, let me describe my background so you can see that you are exactly where i was in 2004.

2001-2005: Bachelor of Physics: UChicago
2005-2007: Deutsche Bank FX Exotics Analyst
2007-2010: UChicago MSFM (Masters of Science in Financial Mathematics)
Starting July 2010: Deutsche Bank FX Exotics Associate

Let me explain something to you, our clients are the exact clientele (quant, PhD traders) you are referring to. Who do you think buys our exotic options? (better question, who do you think is pricing the options?) We know exactly how they trade and what they look for.
And I can tell you, that hedge funds do not buy overpriced digital options, look at level 2 spreads and try to arb us. You know why? because we are the ones who see the flow deeper than anyone and even we wouldn't be arrogant enough to say we know where the price will be in an hour. These things are VERY dynamic.

Speaking as an academic returning to the desk, in reference to your quote "academics probably know more than traders ever will".
Relax son, there's a reason academics teach and traders trade. Not everything in the textbook applies on the desk. I can attest to this and I certainly hope that's the first thing you learn this summer. The ones who do make the successful transition from the academic realm to the desk learn this very quickly (I count myself among them).

M.c.Trader, every model you will derive from first principles has to be adjusted to account for the realities of the market. Heston-Nandi models of volatility are a classic example.

There's a reason our desks make "tons of money" as well. Because our equally brilliant sell-side quants are here working day and night to ensure that once we find the arbitrage-free value in the academic world, we can adjust it for the real-world then mark it up to make a profit. So please, dont act like people on the exotics desk are art history majors who talk a good game to clients.

A word to the wise, do not take that hard-nosed academic stance into your internship, it is a turn off to someone who has to breathe these markets in concrete terms (not some 10-page proof) day in and day out. You'll learn a lot if you drop the academic defense, trust me.

I hope its clear that I'm not biased, I've seen both sides of this argument firsthand. And my 3-year MSFM was quite annoying at times because I'd spent 2 years on the desk and realized that so much of what you are tought needs to be "fudged" or you will get killed in the business.

if YOU have any questions about how this really works, give me a shout, but seriously go in with an open mind or you wont enjoy it

    • 4
May 14, 2010

I don't think I've ever agreed with anything as much as I agree with that, FXTrader.

    • 1
May 14, 2010

Thanks for the advice, I'll def. heed that and I agree with you on all points, I got carried away. I sent you a PM and hopefully we'll chat.

I'm applying to the UChicago program as well, taking the GRE Wednesday actually, don't know whether to apply to Math or the MSFM, def. would like to hear what you though about it.

May 14, 2010

Well said FX! Definitely keep an open mind M.C., I would wager you might come out with a different perspective.

Jan 23, 2012

Do you guys know/use any site that has a minimal deposit that is lower than 50$.
Thanks!

Jan 26, 2012
jonabrown77:

Do you guys know/use any site that has a minimal deposit that is lower than 50$.
Thanks!

Yes but I think it'd be easier if I just had you transfer the money to me, as the effect on your account will be basically the same.

Jan 30, 2012
Tupac:
jonabrown77:

Do you guys know/use any site that has a minimal deposit that is lower than 50$.
Thanks!

Yes but I think it'd be easier if I just had you transfer the money to me, as the effect on your account will be basically the same.

Forex software

I was thinking about using some trading software such as Forex Megadroid or Fap Turbo software. Has anyone used any of this software at all? I did find this PDF on the Forex Megadroid which is helpful (http://www.thepdfportal.com/forex_megadorid_3.pdf). Unfortunately all of the "reviews" on the web look like affiliates.

Jan 24, 2012

Buy a tight call spread if you want a freaking binary without giving up 10% on the trade. Exchange traded options are the only way for retail investors.

Jan 26, 2012

a big thanks to whoever brought this thread back. absolutely awesome read.

Jan 30, 2012

Forex software?

I was thinking about using some trading software such as Forex Megadroid or Fap Turbo software. Has anyone used any of this software at all? I did find this PDF on the Forex Megadroid which is helpful (http://www.thepdfportal.com/forex_megadorid_3.pdf). Unfortunately all of the "reviews" on the web look like affiliates..

Jan 30, 2012
jonabrown77:

Forex software?

I was thinking about using some trading software such as Forex Megadroid or Fap Turbo software. Has anyone used any of this software at all? I did find this PDF on the Forex Megadroid which is helpful (http://www.thepdfportal.com/forex_megadorid_3.pdf). Unfortunately all of the "reviews" on the web look like affiliates..

..."Megadroid"

..."Fap" Turbo

I don't even...

Feb 3, 2012

hey can someone toss me a golden or silver banana or something?

May 20, 2012

I agree it's obvious odds are stacked against avg. binary options trader. I say to be profitable you have to KNOW thy financial instrument when it sleeps/activates/mutplies. Those have had no experience in market will eventually lose out after beginners luck streak or two. As for the experienced spot Fx Traders who ACTUALLY know their technical analysis/charts, i think they can exploit to turn odds in their favor. One lady trader from SG by name of "cherrycoke" is the queen of BO's has proven to beat B.O. brokers over and over again and interesting doing so while holding to a "Nanny Job" Google "CherryCoke Binary Options" a trader who likes to take naps after winning 500-1000$ on daily basis(perhaps non-over trading is her secret to success,whereas most traders after winning 5 trades carry on trading till they blow up) So, i say, if she can do it? why can't an experience trader who knows his technicals repeat the same, granted odds are against us.

Keep on sucking till you succeed, Curley.

    • 1
Oct 13, 2012

I've been considering playing these binary options, but after reading this thread there is no doubt in my mind
I can't win. If you certified math and market geniuses feal it's a loosing proposition, then what chance would the rest of us have? Thanks guys, very informative

Oct 16, 2012

So how much of this am I expected to know for S&T SA interviews and a SA position? I've basically been teaching myself vanilla option theory using Natenberg's book, but this thread made me question whether or not I know enough for the interviews. Any comments on this? Awesome thread by the way.

Oct 16, 2012

Oh... my... god... this is the GREATEST thread I have ever seen on WSO... bookmarking this.

Aug 21, 2013

Well,that gives a clear idea..Thanks i found what i was looking for.

Dec 6, 2013

Great Thread! Although I am new to WSO, I have been trading Forex and Binary Options for well over 8 years.

I totally agree that the Reward:Risk ratio (i.e. 70%:90%) is a massive obstacle to overcome and prevents most traders from ever realizing any serious profits. I also appreciate that if you have the facilities, such as those of a renowned hedge fund, that you are well capable of generating serious returns by simply predicting the correct directional movements of assets. However, you probably need $millions of dollars a year to service the expensive tools and properly qualified personnel required to achieve this goal. I am sure that some of you can produce very accurate figures.

So, in my mind, here is the main problem. Does Joe Average have any hope of making a stream of worthwhile profits trading binary options since the odds are stacked so much against him? With a limited budget of just a few thousand dollars, he will certainly not have the facilities of a hedge fund at his disposal.

I have been studying this problem for years. I have concluded that it is possible if the following approach is adopted. A strategy is required that boosts a win:loss ratio of at least 50% (much higher is preferable). The next critical step is to produce a Reward:Risk ratio that is greater than unity as the standard ones are well less than that value, e.g. 70%:90% = 0.77.

This objective can be achieved in a number of ways. However, in doing so every aspects of trading binary options has to be viewed in a completely different light. For example, you cannot continue to focus on 60sec trades as most novices are prone to do so.

To accomplish this task, I have devised a complete theory which I have dubbed, 'my Theory of Binitivity'.

I can tell you now that this is no quick-fix instant solution but requires the investment of a considerable amount of time and energy to perfect. However, the effort is well worth it. I am thinking of introducing the concepts of my theory onto this forum if there is enough interest. This is because I would appreciate third party insights. I guess that this task could take over six months to fully accomplish.

In the meantime, good luck with your trading.

    • 1
Dec 7, 2013

I made a mistake in my first message with the Reward: Risk ratio.

Envisage that $100 was wagered on an asset displaying a payout ratio of 70% and a refund ratio of 10%. As a return of $70 would be collected if ITM and a loss of $90 when OTM, the Reward: Risk ratio would be 70:90 or 44%.
So, basically one of the central concepts of my theory is that this ratio must be improved so that it is greater than 50% in order to enhance prospects of consistent profits.

I have created a strategy based on my theory which succeeded in generating a Win: Loss ratio of 60% and a Reward: Risk ratio of 59% during the last trading week, ending 6th December 2013. Consequently, I acquired a weekly profit of almost 12%. In fact, over the last few months, my strategy has consistently recorded weekly profits between 10% and 15%.

To achieve these dependable returns, I have had to utilize a series of operational procedures as well as an outlook which are completely different from the standard ones normally adopted by binary options novices. These are defined within my theory.

Just for your information, I am not attempting to sell anything and, as such, no affiliate links, etc. will ever be contained within my messages. In contrast, I am trying to define whether a normal trader, possessing a very restricted budget, has any hope of acquiring a consistent stream of worthwhile profits from trading Binary Options. The figures supplied above indicate that this objective is definitely achievable but only if a totally different philosophy is adopted. My 'Theory of Binitivity' identifies such a tool.

    • 1
Dec 9, 2013

So, what is 'Terry's Theory of Binitivity'?

By using such a name, I certainly do not mean any disrespect towards the great Albert Einstein. Nevertheless, just in an identical manner to how his renowned Theory of Relativity explains many discrepancies about the universe, mine tries to achieve a similar objective with Binary Options.

The central component of my theory is an equation which is basically a summation of a number of major factors which I have assessed will directly influence the ability of a binary options trader to achieve a consistent sequence of winning trades. The final result of the equation is presented within a range between 0% and 100%.

What is its specific use? Essentially the theory can be deployed to make sense of the many conflicting and varying characteristics of binary options trading. For example, you can use it to assess whether the key building stones of a strategy will produce profits on a consistent basis. In particular, the equation needs to register a value of 90% or greater. Such a large result is required in order to essentially offset the negative features of the Reward:Risk ratio problem.

Is a theory really required? I definitely believe so after spending many years trading and analyzing binary options. See what you think if I introduce some of its key concepts over the coming weeks. I will be very interested in your opinions.

    • 1
Dec 16, 2013

Why a Binary Options Theory is Needed

1. What is a Theory?

A good theory should essentially provide a substantiated frame-work, structured on facts, for defining a specific topic of interest. Such a tool should be able to describe the subject in its entity by including explanations for any oddities or discrepancies. You should also be able to use this hypothesis to predict future trends and behavior.

In addition, a theory should attempt to define the inter-relationships between the primary components of the phenomenon in focus. However, you must appreciate that a hypothesis could be inaccurate. Nevertheless, by designing one in the first place you will have a benchmark to compare future findings from the tests you subsequently perform using it.

2. Why a Theory is Needed to Explain Binary Options

This is because if you study binary options by trading them for any significant length of time, you will eventually conclude that strange factors or discrepancies are definitely present. If fact, they are so prevalent that they cause almost 95% of traders to fail by eventually losing their entire deposits. This observation is definitely peculiar since binary options possess many substantial advantages compared to other forms of trading. To acquire a deeper insight into these major inconsistencies, let us investigate further.

The fundamental concepts of binary options were initially constructed using those of the 'standard option' during the mid-2000s. Basically, a new trading mechanism was required possessing a simplified format that would subsequently be much easier to understand and implement. As such, the resultant product, binary options, was intended to be more accessible to the general public by allowing them to more readily speculate on the financial markets.


3. The Discrepancies

So, what is going on? As binary options were specifically designed with ease-of-operation as a prime stipulation so that they possess extensive benefits, surely making profits with them should be a walk in the park. Sadly, this is not the case as only about 5% of all traders make any serious and consistent returns.

What is even more worrisome is that this profitable minority tend to be large financial institutions possessing substantial technical and financial resources. As they have the necessary modelling tools, equipment, qualified personnel and budgets, they can readily predict how assets will react to new catalysts within specified time-scales.
Jane and John Doe, who comprise the remaining 95%, certainly do not have anywhere near these amenities at their disposal. Consequently, their abilities to record constant returns are substantially reduced. This fact is not because such individuals do not make substantial efforts attempting to master this form of investment.

This is why you need s hypothesis, such as my 'Theory of Binitivity' in order to place all the central features of this intriguing subject into context. Otherwise, you will simply continue to extend considerable amounts of time, energy and money going around in circles before eventually crashing.

    • 1
Feb 2, 2018

not really sure what the hell you are saying, but here's an awesome thread on binary options that makes a lot more sense than that weird sentence you wrote

http://www.wallstreetoasis.com/forums/binary-options

Feb 2, 2018

learned something new today.. they seem to be a blatantly bad investment though

Feb 2, 2018
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Apr 16, 2018
Feb 17, 2020