Binary option: Difference between revisions

Revision as of 21:39, 13 July 2022

Revision as of 07:30, 4 August 2022

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While binary options may be used in theoretical asset pricing, they are prone to [[fraud]] in their applications and hence banned by regulators in many jurisdictions as a form of [[gambling]].<ref name="Globes 12-15-16" /> Many binary option outlets have been exposed as fraudulent.<ref>{{Cite web |url=https://www.fbi.gov/news/stories/binary-options-fraud |title=Binary Options Fraud |website=Federal Bureau of Investigation |language=en-us |access-date=2017-05-30}}</ref> The U.S. [[Federal Bureau of Investigation|FBI]] is investigating binary option scams throughout the world, and the Israeli police have tied the industry to criminal syndicates.<ref name="FBI">{{cite news |last1=Weinglass |first1=Simona |authorlink=Simona Weinglass|title=FBI says it's investigating binary options fraud worldwide, invites victims to come forward |url=http://www.timesofisrael.com/fbi-says-its-investigating-binary-options-fraud-worldwide-invites-victims-to-come-forward/ |access-date=February 15, 2017 |work =[[The Times of Israel]] |date=February 15, 2017}}</ref><ref name="ToIidesofM"/><ref name=":1" /> The [[European Securities and Markets Authority]] (ESMA) have banned retail binary options trading.<ref name="esma.europa.eu">{{Cite web |url=https://www.esma.europa.eu/press-news/esma-news/esma-agrees-prohibit-binary-options-and-restrict-cfds-protect-retail-investors |title=ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors |website=www.esma.europa.eu|access-date=2019-03-21}}</ref> [[Australian Securities and Investments Commission]] (ASIC) considers binary options as a "high-risk" and "unpredictable" investment option, <ref>{{Cite news |url=http://www.ibtimes.com.au/binary-options-trading-australia-how-safe-it-1568192 |title=Binary Options Trading In Australia: How Safe Is It? |date=2018-05-14 |work=International Business Times AU |access-date=2018-05-22 |language=en}}</ref> and finally also banned binary options sale to retail investors in 2021.<ref name="asic.gov.au">{{cite web |url=https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-064mr-asic-bans-the-sale-of-binary-options-to-retail-clients|title=21-064MR ASIC bans the sale of binary options to retail clients |website=www.asic.gov.au|access-date=8 March 2022}}</ref>

The FBI estimates that the scammers steal US$10 [[billion]] annually worldwide.<ref name="TimesofI3417">{{cite news |last1 =Weinglass |first1=Simona |title=As Israel-based financial fraud soars, police swoop on 20 suspects as part of global, FBI-led sting |url= http://www.timesofisrael.com/as-israel-based-financial-fraud-soars-police-swoop-on-20-suspects-as-part-of-global-fbi-led-sting/ |access-date=March 4, 2017 |work=The Times of Israel |date=March 4, 2017}}</ref> The use of the names of famous and respectable people such as [[Richard Branson]] to encourage people to buy fake "investments" is frequent and increasing.<ref name=branson>{{cite news |url= https://www.theguardian.com/business/2017/may/17/richard-branson-virgin-says-scammers-are-using-his-name-to-dupe-investors |title=Richard Branson says scammers are using his name to dupe investors |work =The Guardian |date=18 May 2017 |author=Press Association |access-date= 18 May 2017}}</ref> Articles published in ''[[The Times of Israel]]'' newspaper explain the fraud in detail, using the experience of former insiders such as a job-seeker recruited by a fake binary options broker, who was told to "leave [his] conscience at the door".<ref name="israeltimes1"/><ref name="israeltimes2"/> Following an investigation by ''The Times of Israel'', [[Cabinet of Israel|Israel's cabinet]] approved a ban on sale of binary options in June 2017,<ref>{{citation |title=Israel cabinet approves ban on sale of binary options |work =Reuters |author=Tova Cohen |date=June 18, 2017 |url=https://www.reuters.com/article/us-israel-binaryoptions-lawmaking-idUSKBN19906C |access-date=2017-07-15}}</ref> and a law banning the products was approved by the [[Knesset]] in October 2017.<ref name="AtLast">{{cite news |last1=Weinglass |first1=Simona |title=Israel bans binary options industry, finally closing vast, 10-year fraud |url=https://www.timesofisrael.com/israel-bans-entire-binary-options-industry-finally-closing-vast-10-year-fraud/ |access-date=October 24, 2017 |publisher=[[The Times of Israel]] |date=October 23, 2017}}</ref><ref name="Knesset ban 10-24-17">{{Cite news |url=https://www.haaretz.com/israel-news/business/1.818782 |title=Israel Bans Binary Options Industry That Defrauded Millions |last=Tomer |first=Uri |date=2017-10-24 |work=Haaretz |access-date=2017-10-24 |language=en}}</ref>

On January 30, 2018, [[Facebook]] banned advertisements for binary options trading as well as for [[cryptocurrencies]] and [[initial coin offering]]s (ICOs).<ref name="blomm13018">{{cite news |last1=Frier |first1=Sarah |last2=Verhage |first2=Jules |title=Facebook Bans Ads Associated With Cryptocurrencies |url=https://www.bloomberg.com/news/articles/2018-01-30/facebook-bans-ads-associated-with-bitcoin-cryptocurrencies |access-date=February 7, 2018 |work =Bloomberg |date=January 30, 2018}}</ref><ref name="FT013018">{{cite news |last1=Cornish |first1=Chloe |title=Facebook and regulators move to halt cryptocurrency scams |url=https://www.ft.com/content/9c1050ca-05f8-11e8-9650-9c0ad2d7c5b5 |access-date=February 7, 2018 |work =[[Financial Times]]|date=January 30, 2018}}</ref> [[Google]] and [[Twitter]] announced similar bans in the following weeks.<ref name="EU1">{{cite news |title=European Union bans binary options, strictly regulates CFDs |url=https://www.timesofisrael.com/european-union-bans-binary-options-strictly-regulates-cfds/ |last1=Weinglass |first1=Simona |date=March 28, 2018 |access-date=March 21, 2019 |publisher=The Times of Israel}}</ref>

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===Asset-or-nothing put===

This pays out one unit of asset if the spot is below the strike at maturity. Its value now is given by:

:<math> P = Se^{-qT}\Phi(-d_1). \,</math>

===American style===

[[File:American binary put.png|thumb|American binary put with K = 100, r = 0.04, σ = 0.2, T = 1.]]

An [[American option]] gives the holder the right to exercise at any point up to and including the expiry time <math>T</math>. That is, denoting by <math>K</math> the strike price, if <math>K\geq S</math> (resp. <math>K\leq S</math>), the corresponding American binary put (resp. call) is worth exactly one unit. Let

:<math> a=\frac{1}{\sigma}\ln(K/S)\text{, }\xi=\frac{r-q}{\sigma}-\frac{\sigma}{2}\text{, and }b=\sqrt{\xi^{2}+2r}. \,</math>

The price of a cash-or-nothing American binary put (resp. call) with strike <math>K<S</math> (resp. <math>K>S</math>) and time-to-expiry <math>T</math> is:

:<math> \frac{1}{2}e^{a\left(\xi-b\right)}\left\{ 1+\operatorname{sgn}(a)\operatorname{erf}\left(\frac{bT-a}{\sqrt{2T}}\right)+e^{2ab}\left[1-\operatorname{sgn}(a)\operatorname{erf}\left(\frac{bT+a}{\sqrt{2T}}\right)\right]\right\} \,</math>

where <math>\operatorname{erf}</math> denotes the [[error function]] and <math>\operatorname{sgn}</math> denotes the [[sign function]]. The above follows immediately from expressions for the Laplace transform of the distribution of the conditional first passage time of Brownian motion to a particular level.<ref>[http://parsiad.ca/post/closed-form-expressions-for-perpetual-and-finite-maturity-american-binary-options Closed-form expressions for perpetual and finite-maturity American binary options]{{Dead link|date=June 2019 |bot=InternetArchiveBot |fix-attempted=yes }}. parsiad.ca (2015-03-01). Retrieved on 2016-07-18.</ref>

motion to a particular level.<ref>[http://parsiad.ca/post/closed-form-expressions-for-perpetual-and-finite-maturity-american-binary-options Closed-form expressions for perpetual and finite-maturity American binary options]{{Dead link|date=June 2019 |bot=InternetArchiveBot |fix-attempted=yes }}. parsiad.ca (2015-03-01). Retrieved on 2016-07-18.</ref>

===Foreign exchange===

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The [[Isle of Man]], a self-governing Crown dependency for which the UK is responsible, has issued licenses to companies offering binary options as "games of skill" licensed and regulated under fixed odds betting by the [[Isle of Man Gambling Supervision Commission]] (GSC).<ref>{{cite web | url =https://www.gov.im/categories/business-and-industries/gambling-and-e-gaming/licence-holders/ | title =Licence holders | website =gov.im | publisher =Isle of Man Government | access-date =2017-09-02}}</ref> This positions binary options as a form of gambling, and the administrator of the trading as something akin to a casino, as opposed to an [[Exchange (organized market)|exchange]] or [[brokerage house]].

On October 19, 2017, [[City of London Police|London police]] raided 20 binary options firms in London.<ref name="FT10192017"/> On January 3, 2018, [[Financial Conduct Authority]]the (FCA) took over regulation of binary options from the [[Gambling Commission]].<ref name=ftfca /> In December 2018, FCA has proposed new rules which would permanently ban the sale, marketing and distribution of binary options to retail consumers.<ref>{{cite web|url=https://www.ftadviser.com/regulation/2018/12/07/fca-to-permanently-restrict-binary-options-sales/ | title=FCA to permanently restrict binary options sales | date=December 7, 2018 | last=Fantato|first=Damian|website=FTAdviser|access-date=December 8, 2018}}</ref>

;Fraud

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;Binary options trading

In the United States, the [[Securities and Exchange Commission]] (SEC) approved [[Exchange-traded product|exchange-traded]] binary options in 2008.<ref>{{Cite news|url=https://www.reuters.com/article/companyNewsAndPR/idUSN0943920080609|title=CBOE to list binary options on S&P 500, VIX |last=Frankel |first = Doris |date=June 9, 2008 | publisher=[[Reuters]] | access-date=December 8, 2018}}</ref> Trading commenced on the [[American Stock Exchange]] (AMEX) and the [[Chicago Board Options Exchange]] (CBOE) in May and June 2008.<ref name=leapinfo>{{cite web | url=https://www.leaprate.com/news/the-history-of-binary-options-trading-infographic/ | title=The History of Binary Options Trading – Infographic | date=January 5, 2017 | website=leaprate.com | access-date=December 8, 2018}}</ref>

AMEX (now NYSE American) offers binary options on some [[exchange-traded fund]]s and a few highly liquid equities such as [[Citigroup]] and [[Google]]. On the exchange binary options were called "fixed return options" (FROs). To reduce the threat of [[market manipulation]] of single stocks, FROs use a "settlement index" defined as a volume-weighted average of trades on the expiration day. AMEX and [[Donato A. Montanaro]] submitted a [[patent application]] for exchange-listed binary options using a volume-weighted settlement index in 2005.<ref>[http://www.wipo.int/pctdb/en/wo.jsp?wo=2005069978 "System and methods for trading binary options on an exchange"] {{Webarchive|url=https://web.archive.org/web/20090218165844/http://www.wipo.int/pctdb/en/wo.jsp?wo=2005069978 |date=2009-02-18 }}, World Intellectual Property Organization filing. Retrieved on 2013-01-12.</ref> CBOE offers binary options on the [[S&P 500]] (SPX) and the [[VIX|CBOE Volatility Index (VIX)]].<ref name="cboebin">{{cite web| url=http://www.cboe.com/micro/binaries/BinariesQRG.pdf | title=CBOE Introduces Binary Options on SPX SM and VIX | date=September 10, 2008 | publisher=[[Chicago Board Options Exchange]] | archive-url=https://web.archive.org/web/20080910044859/http://www.cboe.com/micro/binaries/BinariesQRG.pdf | archive-date=September 10, 2008 | access-date=December 8, 2018}}</ref> The tickers for these are BSZ<ref>{{cite web|url=http://www.cboe.com/delayedquote/detailed-quotes?ticker=BSZ | title=^BSZ (CBOE Binary Options On The S&P 500 Index) | date=December 8, 2018 | publisher=[[Chicago Board Options Exchange]] | access-date=December 8, 2018}}</ref> and BVZ, respectively.<ref>{{cite web | url=http://www.cboe.com/delayedquote/detailed-quotes?ticker=BVZ | title=^BVZ (CBOE Binary Options Volatility) | date=December 8, 2018 | publisher=[[Chicago Board Options Exchange]] | access-date=December 8, 2018}}</ref>

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;Fraud

On June 6, 2013, the U.S. [[Commodity Futures Trading Commission]] (CFTC) and the [[U.S. Securities and Exchange Commission|Securities and Exchange Commission]] (SEC) jointly issued an Investor Alert to warn about fraudulent promotional schemes involving binary options and binary options trading platforms. The two agencies said that they had received numerous complaints of fraud about binary options trading sites, "including refusal to credit customer accounts or reimburse funds to customers; [[identity theft]]; and manipulation of software to generate losing trades". Other binary options operations were violating requirements to register with regulators.<ref name="CFTC investor warning" /><ref name="SEC1">{{cite web| url=https://www.sec.gov/investor/alerts/ia_binary.pdf | title = Investor Alert Binary Options and Fraud | publisher=[[U.S. Securities and Exchange Commission]] | access-date = December 8, 2018}}</ref>

In June 2013, U.S. regulators charged Israeli-Cypriot company [[Banc De Binary]] with illegally selling binary options to U.S. investors.<ref name="CFTC investor warning" /><ref name=":0">{{cite web|url=https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575220#.U4Au_ygVcWQ|title=SEC Warns Investors About Binary Options and Charges Cyprus-Based Company with Selling Them Illegally in U.S.|publisher=[[U.S. Securities and Exchange Commission]] | access-date=December 8, 2018}}</ref> In February 2016, the company reached an $11 million settlement with U.S. authorities. Regulators found the company used a "virtual office" in New York's [[Trump Tower]] in pursuit of its scheme, evading a ban on off-exchange binary option contracts. The company neither admitted nor denied the allegations.<ref>{{cite news| url=https://www.wsj.com/articles/banc-de-binary-reaches-11-million-settlement-with-u-s-authorities-1456409180 |title = Banc de Binary Reaches $11 Million Settlement with U.S. Authorities |newspaper = [[The Wall Street Journal]] | date=February 25, 2016 | last=Patrick | first=Margot |access-date=December 8, 2018}}{{subscription}}</ref> In November 2016, SEC published yet another Investor Alert on binary options websites.<ref>{{cite web|url=https://www.sec.gov/oiea/investor-alerts-bulletins/ia_binaryoptions.html | title=Investor Alert: Binary Options Websites May Be Used for Fraudulent Schemes | date=November 10, 2016 | publisher=[[U.S. Securities and Exchange Commission]] | access-date=December 8, 2018}}</ref> In 2016,