Binary options, little-known investment tools used primarily by sophisticated investors, are involved in the most common type of scams reported to one regulatory telephone hotline. The Financial Industry Regulatory Authority (FINRA) recently issued a warning — two years after a similar Securities and Exchange Commission warning — advising investors to beware of binary options scams.
Callers to FINRA’s Senior Helpline complained that firms that presented themselves as legitimate binary options traders failed to deposit funds in client accounts, refused to return deposited funds or demanded fees for funds’ return. One scammer pretended to be a regulator and attempted to collect a fine for illegal trading. Callers also complained about identity theft by purported options traders who hijacked personal information investors used to open accounts.
Binary options are contracts that have investors pay a fee in return for the chance to profit on the answer to a yes-no question. The question may be, “Will the dollar close higher against the euro today?” If the option buyer guesses correctly, he or she profits. In a typical instance, $50 may buy an option that will generate 50% profit if the buyer guesses correctly about the closing price of a stock on a given date. If not, the investor loses the fee.
Binary options have legitimate uses for hedging risks by fund managers and other sophisticated investors. And the limited downside and low capital requirements make binary options attractive to some other investors. However, they are rarely appropriate for most investors. The SEC warned that the options are highly risky and, in fact, investors will, on average, lose money on typical binary options.
The obscurity of binary options may be one reason they are turning up in frauds, said Gerri Walsh, FINRA’s senior vice president of investor education. “Binary options generally are not as well understood by the public as stocks or bonds, and perhaps that makes it easier for scammers to use binary options as part of a fraudulent scheme,” she said.