It’s marketed as an investment opportunity and a route to easy money, but binary options trading can be more like betting on a coin flip without any protection for your funds. Binary options trading through regulated platforms can offer ways to bet on market movement while moderating risk. Unfortunately, the binary options landscape is full of fraud. Many investors lose money—sometimes even their entire life savings—to con artists who trick them into believing binary options are their ticket to financial gain.
Binary Options Trading
With a binary options trading strategy, the holder is effectively betting on whether the price of a particular index or asset will rise or fall versus a certain price level. If you bet right, you are paid a fixed rate of return. If the market doesn’t hit your price, you lose your investment. It’s an all-or-nothing proposition. The binary option can be a bet on the price of an index, stock, currency or some other asset. However, the binary option buyer never actually owns the underlying investment asset.
In the U.S., the Securities and Exchange Commission and Commodity Futures Trading Commission regulate binary options platforms and trading. A joint SEC-CFTC investor alert explains the win-or-lose nature of binary options trading and cautions that not all internet-based trading platforms comply with U.S. regulatory requirements. The alert also notes that trading platforms may “overstate the average return on investment by advertising a higher average return on investment than a customer should expect, given the payout structure.”
Binary Options Fraud
The rise of illegally operated, internet-based trading platforms have opened up new avenues for scammers, and fraudulent binary options platforms are particularly common. Investors are lured into trying their hand at binary options trading, using “demo,” accounts or a modest initial investment stake. Trading takes place through platforms that seem legitimate, but are in fact are nothing but smoke and mirrors. One consistent element of these fraudulent platforms: they almost always show the investor making money—and lots of it. As “profits” grow, the scammers ask, or even demand, that you deposit more and more money.
Then the problems begin. In some cases, a fraudulent binary trader simply won’t credit or reimburse their option holders as promised. In other words, they’ll take the money and run. Or they may tell the option holder to send funds for payment of taxes or other fees in order to receive the option “profits.” Internet-based traders may also harvest credit card numbers and other personal information useful for committing identity theft.
There are also follow-up scams. Once victims have lost money on binary options, they may be contacted with false promises to help recover their funds—for an up-front fee. Scammers may even pose as government representatives claiming that the scam victim owes fines for illegal trading.
If someone contacts you claiming to be affiliated with a government agency and pressures or threatens you into sending money, treat these as warning signs of an impostor who is trying to work a scam. Be aware that the IRS will notify you by mail first if you owe money, not by phone or email, and the SEC does not charge money to help people recover investment losses.
To protect yourself from internet-based binary options scams, consider these tips:
- Be wary of any internet trading platforms that appear to originate in foreign countries. These platforms may not be complying with regulatory requirements in your own country—and may be fraudulent.
- Learn to spot the signs in binary options scams. The Financial Industry Regulatory Authority (FINRA), Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and Canada’s Investment Industry Regulatory Organization (IIROC) have all issued alerts about the dangers of binary options scams.
- Call FINRA’s helpline in the U.S. to ask about potential binary options scams: (240) 386-HELP (4357).
- If considering a purchase of binary options, carefully research the trading platform before you buy.
- Check with CFTC to see if the binary options trading platform is a “designated” market. Call: 1-866-FON-CFTC.
- Check with SEC’s EDGAR system to see if the binary options offering is registered with SEC, and also whether the platform is registered as an exchange. Call: 1-800-SEC-0330.
- Use FINRA’s BrokerCheck® to see if binary options brokers are registered.
- According to the IIROC, in Canada” “Binary options cannot be offered or sold to retail investors in Canada.” Anyone offering such options in Canada should be reported at once to provincial securities commissions.
- Don’t provide copies of your credit card, driver’s license, or other sensitive documents online.
- Never pay upfront money to individuals who may contact you, claiming they can help you recover an investment loss.
- Check BBB.org’s Scam TrackerSM to read reports on how scammers operate.
- If you think you may have encountered a binary options scam, you can file a complaint or a tip with the FBI Internet Crime Complaint Center at gov.