In its effort to expand investor education, the Commodity Futures Trading Commission has released a pair of videos to warn investors against buying binary options before they check the legitimacy of the seller.
A binary option is a straightforward yes/no trade that can be worth 100 or zero at expiration based on a market prediction. No other settlement price is possible, and there are no shares to exercise.
The videos star two different investors — a young man and an older man — who were both ripped off by salesmen of these products. The young man said the online ad looked interesting, the online trading platform looked legit and the broker phone calls appeared to provide personal attention.
The older man didn’t know what binary options were when he got a phone call pitching the product but invested $300 anyway. Not a lot of money.
Eventually both investors tried to withdraw money from their accounts, which were showing profits — the older man thought he had $60,000 in his account — and both were told they had to add more money in order to qualify for the withdrawals. That’s when they realized they had been defrauded and contacted the CFTC.