Binary Options Pricing

If you’ve noticed, there are a lot of videos out on YouTube of people claiming that certain binary options brokers are scams. Of course, being a savvy customer, you should investigate these claims and do proper due diligence. This begs the question, how do brokers make money with binary options if they don’t charge a commission? Like any business, there is a cost associated with turning on the lights, paying employees, running servers, bandwidth…so on and so forth.

Let’s Assume 5,000 traders are going to trade digital options on the EUR/USD with an average bet size of $50. In addition, we’ll assume the payout is 71% with no refund if the trader loses.

With that said, there is a total of $250,000 invested. To make things interesting, let’s say that 3,000 of these traders think the EUR/USD will be higher by the expiration period and 2,000 traders think the currency pair will be lower.

If the EUR/USD does trader higher, this is how the math breaks down:

• 3,000 traders put in $50 for a total of $150,000.
• They will earn 71% or $106,500.
• The 2,000 traders will earn zero and lose $100,000.

In this example, the broker lost $6,500. That’s what I call bad business.  So what needs to happen here?

When a trade becomes too one sided, in our example, 60% of the traders took the upside. The broker needs to try to balance the betting sides equally or reduce the payout.

For example, if the broker reduced their binary options pricing payout to 65%.

The 3,000 traders would make $97,500…and the 2,000 losing traders would be out of a $100,000. This would make the binary options broker a profit of $2,500.

With that said, the payout gives us information on the number of participants and the way that traders are positioned. Of course, the broker could eat the loss, if other trades they have are providing profitable outcomes for them. Remember, they are running a business….and the goal of every business is to make a profit.

So if you see a high payout, it could mean that there are few participants trading that currency pair. For more exotic bets, like touch and range options…there is a probability element embedded in the payout.

Another thing, I wouldn’t trust the ‘trader’s choice’ ….or at the very least, wouldn’t trade based off those numbers. But as you can see from these examples, a good broker can still make money with the majority of their customers winning if they structure the payouts correctly.

In other words, a good binary option brokers wants you to trade often, they also want you to win…they just can’t have too many trades be one sided or the payouts will decrease.