This article will show you how your success rate needs to be in order to make money under the different combinations of return/rebate.
We split our explanations under the two different scenarios: efficient market theory and non-efficient market theory.
In the efficient market theory, a trader can call the market right 50% of the times, and he is in the loss side in the other 50% of time; in the opposite hypothesis that the efficient market theory is not valid, the probability of the trader to be in the right position is not necessarily equal to 50%, but depends on his/her ability to predict the market movement.
Some definition:
Return: payout for the trader when the binary option expires in-the-money (ITM); usually between 70% and 85%;
Rebate: payout for the trader when the binary option expires out-of-the-money (OTM); usually between 0% and 15%.
Expected return: statistical return that the platform or the trader should expect when trading indefinately.
Assumption: efficient marker theory
Under this hypothesis, we can calculate the expected returns for the platform and for the investor as follows.
Platform Expected Return = ((1-Probability of winning) x (1-Rebate) - (Probability of losing x Return))
which in the case of the platform paying out 100% return and rebating 0% is:
Platform Expected Return = ((1 – 50%) x (1-0%)) – (50% x 100%) = 0%
So, with the Return set at 100% and Rebate at 0% the expected return is $0.
If the option return is 90% and the rebate is 0% we have :
Platform Expected Return = ((1 – 50%) x (1-0%) – (50% x 90%)) = (50% – 45%) = 5%
Investor Expected Return = ((50% x 90%) – (1 – 50%) x (1-0%)) = (45% – 50%) = -5%
This means that statistically the binary investor must expect to lose 5% if the probability to be in-the-money and to be out-of-the-money is 50%, this being like the case of the Head or Tail game, while under the same circumstances the expected return of the binary platform is 5%.
We can then calculate the platform and the investor expected returns for different pairs of Return-Rebate
Return 70% - Rebate 10%:
Platform Expected Return = ((1 – 50%) x (1-10%) – (50% x 70%)) = (45% – 35%) = 10%
Investor Expected Return = ((50% x 70%) – (1 – 50%) x (1-10%)) = (35% – 45%) = -10%
This means that investing infinite times in binary options with return 70% and rebate 10%, the investor will lose 10% and the platform will make 10% under the assumptions of the Efficient Market Theory (50% of probability to be in-the-money, 50% to be out-of-the-money)
Return 90% - Rebate 10%:
Platform Expected Return = ((1 – 50%) x (1-10%) – (50% x 90%)) = (45% – 45%) = 0%
Investor Expected Return = ((50% x 90%) – (1 – 50%) x (1-10%)) = (45% – 45%) = 0%
This case is equivalent of the case Return 100% - Rebate 0%; the closer the sum Return+Rebate is to 100%, the closer the expected returns is to 0%.
Assumption: the efficient market theory is not valid
In this case, we assume that the trader can be more successful than 50%.
Hypothesis 1: Return of 85%, Rebate 0%, trader success rate 68% of the time:
Investor Expected Return = ((68% x 85%) – (1 – 68%) x (1-0%)) = (0.578 – 0.32) = 25.8%
Hp2: Return of 85%, Rebate 0%, trader success rate 60% of the time:
Investor Expected Return = ((60% x 85%) – (1 – 60%) x (1-0%)) = (51% – 40%) = 11%
Developing the different trio of Return-Rebate-Trader Success Rate, we can put together the below table and summarize as follows:
EXPECTED RETURNS | ||||||
Investor's success rate | ||||||
50% | 60% | 70% | 80% | 90% | 100% | |
Platform Return = 60% - 0% | -20.0% | -4.0% | 12.0% | 28.0% | 44.0% | 60.0% |
Platform Return = 70%-0% | -15.0% | 2.0% | 19.0% | 36.0% | 53.0% | 70.0% |
Platform Return = 80%-0% | -10.0% | 8.0% | 26.0% | 44.0% | 62.0% | 80.0% |
Platform Return = 90%-0% | -5.0% | 14.0% | 33.0% | 52.0% | 71.0% | 90.0% |
Platform Return = 100%-0% | 0.0% | 20.0% | 40.0% | 60.0% | 80.0% | 100.0% |
Platform Return = 60%-5% | -17.5% | -2.0% | 13.5% | 29.0% | 44.5% | 60.0% |
Platform Return = 70%-5% | -12.5% | 4.0% | 20.5% | 37.0% | 53.5% | 70.0% |
Platform Return = 80%-5% | -7.5% | 10.0% | 27.5% | 45.0% | 62.5% | 80.0% |
Platform Return = 90%-5% | -2.5% | 16.0% | 34.5% | 53.0% | 71.5% | 90.0% |
Platform Return = 100%-5% | 2.5% | 22.0% | 41.5% | 61.0% | 80.5% | 100.0% |
Platform Return = 60%-10% | -15.0% | 0.0% | 15.0% | 30.0% | 45.0% | 60.0% |
Platform Return = 70%-10% | -10.0% | 6.0% | 22.0% | 38.0% | 54.0% | 70.0% |
Platform Return = 80%-10% | -5.0% | 12.0% | 29.0% | 46.0% | 63.0% | 80.0% |
Platform Return = 90%-10% | 0.0% | 18.0% | 36.0% | 54.0% | 72.0% | 90.0% |
Platform Return = 100%-10% | 5.0% | 24.0% | 43.0% | 62.0% | 81.0% | 100.0% |
Platform Return = 60%-15% | -12.5% | 2.0% | 16.5% | 31.0% | 45.5% | 60.0% |
Platform Return = 70%-15% | -7.5% | 8.0% | 23.5% | 39.0% | 54.5% | 70.0% |
Platform Return = 80%-15% | -2.5% | 14.0% | 30.5% | 47.0% | 63.5% | 80.0% |
Platform Return = 90%-15% | 2.5% | 20.0% | 37.5% | 55.0% | 72.5% | 90.0% |
Platform Return = 100%-15% | 7.5% | 26.0% | 44.5% | 63.0% | 81.5% | 100.0% |
The lines in bold are the most common combinations of return/rebate among binary brokers, the lines in shadow are not realistic combinations of return/rebate and are shown here only for comprehension purposes, but no broker will offer them as the expected return would be negative for the broker itself.
As you can see, staying between 60% and 70% of success rate guarantees a very interesting return, while the break-even can be calculated as being 55%: this means that in order to make money in binary options you need to get it right more than 55 times for every 100 trades.
On the basis of this simple statistical calculations, some say is not fair, and that the binary option industry is a way for binary brokers to make money with this statistical advantage similar to the Casino.
We say that this is exactly like in Stock, Forex and Bond trading: when you consider that brokers charge you commissions, fees and that you as an investor “pay” the bid-ask spread, the break-even success rate of the traditional markets is very similar (if not higher) than in binary option trading.
The important thing is to have the account with Regulated Brokers, where your money is safe and you can withdraw your earning with no hassles.
You need then tools to reach the success rate between 60% and 70% in order to have interesting returns in binary options trading, with 55% being the break-even point.
The Binary Optioner Binary offers you a set of trading signals and trading systems with the highest performance in the industry for your trading, under the motto:
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