Zero-sum Game in Binary Options
Binary options offer two simple outcomes: either you are correct and your binary options expire in the money, or you are wrong and your binary options expire out of the money – hence the entire zero-sum game. If you are right, you get your money back, plus the return, and if you were wrong, you get nothing. Well, technically, some binary options brokers offer a 15% refund on your binary options that expired out of the money, but this is more of an exception than a general rule. This is a marketing move that offers a relatively insignificant amount, in order to keep you hooked; basically, you get a free option for every eight that you lose. Not so great, is it? Still, most brokers implement a no refund policy, so the statement about binary options being a zero-sum game still holds, for now.
Zero-sum game explained
Winners and losers are inseparable; you cannot have one without the other. Similarly, in order to pay out the winners in binary options, someone has to lose, and lose big, so there is enough money to go around, to winners and brokers alike. Oddly enough, this system works, and really well, too, or this whole binary options thing would have been awfully short-lived. The secret behind this is in the premium and return (and the way these are calculated). Despite what you might think, it is next to impossible to accurately calculate and quantify the odds of an outcome of a financial event or a price shift, and apply it on something as simple as a binary option. This is not how the system works. Basically, the more likely outcome gets a lower return (most of the time) in order to entice people to bet on it, whereas the return on a less likely outcome has a higher return, in order to get at least some people to bet on it. If the broker did his math right, no matter which side wins, there will always be enough money to pay them out, as well as some remainder, which goes to the broker; these “leftovers” are the bread and butter of their entire operation. It is far more important to predict how many people will bet on each outcome than how likely the outcome actually is. You think you’re betting against the broker, but you’re not. You’re betting against other people, and your broker is the middleman. The reason why the return rates are different is because there will be different amounts of money to be redistributed, depending on the outcome. The more “likely” scenario has lower return because there should be less money to be spent on the return, and vice versa. Basically, all premiums are pooled together, and then the money is divided between the winners and the broker, according to the pre-arranged conditions. From the perspective of an individual client, however, this appears as a “winner takes all” scenario.