Regulated by the USA: What are CFTC Binary Options?
The Commodity Future Trading Commission (CFTC) is a government agency created to protect the market, market participants and the public from fraud in the commodities, futures and options trading marketplace. The secondary mission is to foster open, transparent and fair practices to commodity, future and options markets. Otherwise known as the CFTC, the agency was created in 1974 in accordance with the Commodities Exchange Act. This agency is the first to bring the subject of binary options to the public’s attention when it allowed for exchange listed binary options. This landmark legislation paved the way for today’s global binary options industry.
The way things are going it’s only a matter of time until US traders are cut off completely from EU Style binary options. This is a sad fact but one that we all need to get ready for. With that in mind this is a look into what the real difference between CFTC binary options and CySEC binary options really are. NADEX Exchange and Cantor Exchange (coming soon)are the only places to find CFTC binary options at this time. Both are based on the same principles but there are difference between the two, and between them and EU style trading. No matter what I say, and no matter how confused you may get, remember that CFTC options are binary. If you lose you lose all, if you win you win all. There difference is that between those two events there are lots of profitable opportunities for savvy traders.
The CFTC View on EU Binary Options and Gambling
The CFTC and the SEC regulate all forms of trading in the United States. They govern what, how and where US citizens can trade. This means they also regulate very closely the products being offered, how they are offered and who is doing the offering. They require that all brokers and exchanges be registered with them and adhere to their rules. Their goal is to ensure a fair marketplace for the free exchange or trading of financial instruments, they frown upon high risk activity and gambling. They require that all financial instruments and vehicles of investment to be listed on an exchange. An exchange is a place or website in business of providing a marketplace for investors. An exchange is not in the business of buying or selling securities. In their view EU style options are gambling and not regulated for financial markets, illegal in other words. They say unregistered brokers are not allowed to advertise or offer trading to US citizens, the catch is that there is no law saying US citizens can not seek out EU style binary options from a broker who will accept them.
Exchanges work by connecting two traders together unlike EU style brokers where you are making a bet on market direction directly with the broker. The difference is that the broker makes money on your activity, if you win they lose and if you lose they win, the exchange makes money providing the marketplace and receives a set fee for each trade you make regardless of win or lose. . This style prevents a conflict of interest present with EU style brokers. At no time is anyone but the trader on the opposite side of your trade in the position to profit from your loss.
The CFTC, SEC and FINRA have all issued multiple warnings to investors about fraudulent, offshore and EU style binary options. The CFTC has created the RED list and FINRA has created a hot line. The hot line is intended for seniors who suspect they are the target of a scam but is acceptable for all US based traders. The RED List, short for Registration Deficient List, is a CFTC black list of unregulated brokers who have received complaints of fraud. Link To FINRA Hotline.
OK, I Got That, But How Do They Work?!?
The two biggest differences are that CFTC options can be bought or sold at any time and they have set strikes. It is the set strike prices that allows them to be tradable. The strike price at which the options is in or out of the money stays the same, as asset prices move up and down the strike/expiry combination becomes more or less valuable. Each strike price is either in, at or out of the money all the time. In-the-money options are worth more than at-the-money options which are worth more than out-of-the money options. As the price of the underlying asset moves up and down so too will the prices of the binary option. The options are combinations of strike prices and expiry and subject to market buy-sell forces. Because your trades are matched to other traders there may be an imbalance of supply and demand for options and a skew in prices.
I’m sure by now you see the chance for confusion. These options trade, are subject to market forces, have set strikes and prices that fluctuate so how can they be binary? To overcome this conundrum CFTC NADEX options are priced in the 0-100 method. This means that each option is worth either $0 or $100 at expiration, $0 for out of the money and $100 for in the money. If you buy an option and hold it until expiry and it is in the money it will be worth $100. Before expiry, when you buy it, it will be worth between $0 and $100 depending on market forces and asset prices. Your profit will be the difference between purchase price and $100. In essence CFTC binary options trade just like a spread or a CFD. They have a maximum loss, the purchase price, and a maximum gain, $100, which is very binary, and up until expiry value is pinned to the movement of the underlying asset.
*** We’ll soon publish more articles regarding US style and CFTC binary options trading, as regulation continues to evolve. Stay Tuned!