Binary Options in Australia

Binary options trading has garnered significant attention globally, including in Australia. However, due to its high-risk nature and potential for misuse, it has been subject to stringent regulations.

Offering binary options to retail traders in Australia is illegal. Retail investors are investors that have not been classified as professional investors, and the ban was put in place by the Australian Securities and Investments Commission (ASIC) to protect non-professional investors.

In this article, you will find more information about binary options in Australia, including their current legal status and how they work. As mentioned above, brokers in Australia are only allowed to offer binary options to traders that have been classified as professional traders. ASIC’s ban aims to protect retail investors from the inherent dangers of these speculative products.

Other financial instruments, such as contracts for difference (CFDs), are available for retail traders and offer many of the advantages of binary options. As always, it is important to conduct thorough research before engaging in any form of trading. Every penny you put on the line is a penny you could end up losing.

What are Binary Options?

Binary options are a type of financial instrument that allows traders to speculate on the price movement of an underlying asset or product. The outcome for a classic binary options is binary, meaning there are only two possible results: a fixed payout or losing 100% of the risked amount.

Essentially, traders bet on whether the price of an asset will be above or below a certain level at a specific time.

The binary nature of the classic binary option makes binary options trading very different from traditional speculative trading, e.g. stock trading. A stock trader can buy shares when the price is 100 AUD per share and sell them when the price has dropped to 95 AUD, only losing 5 AUD per share. This is not possible with a classic binary option: you either make a profit (and the exact size of this profit is pre-determined) or you lose everything.

Note: Some brokers offer more exotic binary option types that do not work exactly like this.

Understanding the Basics

1. Choice of Asset: The trader chooses the underlying asset or product, such as a company share, a commodity, a currency pair, or an index.
2. Prediction: They predict whether the price of the underlying will go up or down.
3. Expiry Time: They set an expiry time for the option, which can range from minutes to hours. Some brokers offer binary options that are even more long-term.
4. Investment Amount: The trader decides how much money they want to invest in the trade.
5. Payout and Loss: If the prediction is correct at expiry, the trader receives a fixed payout. If incorrect, the trader loses the investment.

Regulatory Status in Australia

Due to the high-risk nature and potential for investor losses, binary options have faced increased regulatory scrutiny worldwide. In Australia, the Australian Securities and Investments Commission (ASIC) has banned brokers from offering binary options to retail investors.

ASIC Ban on Binary Options

• Ban Implementation: In October 2021, ASIC permanently banned the sale of binary options to retail clients.
• Reason for Ban: The ban was instituted due to significant concerns about the inherent risks, the complexity of the products, and the high probability of retail investors incurring losses.
• Scope: The ban applies to all Australian and foreign firms offering binary options to retail clients in Australia.

Risks Associated with Binary Options

Binary options are considered highly speculative and involve substantial risks, including:

1. All-or-Nothing Outcome: The fixed payout structure means that traders can lose their entire investment if their prediction is wrong.
2. Short-Term Trading: The short duration of most binary options can lead to impulsive and poorly thought-out trades.
3. Lack of Transparency: Pricing and payout structures can be opaque, making it difficult for traders to make informed decisions.
4. High Leverage: The high leverage involved in binary options can amplify losses.
5. Market Manipulation: There is a risk of market manipulation by unscrupulous brokers, especially in unregulated environments.

Alternatives to Binary Options

For those interested in trading financial instruments, there are several alternatives to binary options. Here are a few examples:

1. Forex Trading: Trading currency pairs in the foreign exchange market.
2. CFDs (Contracts for Difference): Allowing traders to speculate on price movements without owning the underlying asset.
3. Stocks: Investing in company shares.
4. ETF:s: Exchange-traded funds. You can trade fund shares in a way similar to trading stocks.
5. Options: A more traditional derivative with better established markets and regulations.

Among these, CFDs are probably the solution that comes closest to binary options trading, since they are available for such a wide range of underlying assets and products, and traders can be very picky with exactly how much money they put on the line and for how long.

A Contract for Difference (CFD) is a legally binding agreement between two parties – typically known as the buyer and the seller – which stipulates that the buyer will pay the seller the difference between the currenct value of the underlying and the value of the underlying at a certain moment in the future.

• If the closing value is higher than the opening value, the Seller will pay the difference to the Buyer. The Buyer makes a profit.
• If the closing value is lower than the opening value, the Seller makes a profit.

The Contract for Difference (CFD) was created in the United Kingdom in 1974 as a way to speculate on the price of gold using leverage. In their original form, they were a type of equity swap traded on margin. The modern-style CFD which is widely available today was developed by Brian Keeland and Jon Wood at UBS Warburg in the early 1990s, and it was in the 1990s that CFD trading really became a widespread practise among speculative traders.