Vol 3, Issue 5. Quarter 1 – 2026.

One of the most famous debaters at ESPN had a silly phrase that he likes to use.

“If it looks like a duck, swims like a duck, and quacks like a duck, it ain’t a damn mongoose!”

There is a fairly new product in the “investment” world called a Binary option. Here is how it works. You pick an economic variable that is tracked in continuous time like the exchange rate between US Dollars and Euros or the level of the S&P 500 index at the end of each day. You then enter into a contract of the following form. “You submit a payment of $10. If the value being tracked rises over the next minute (for the exchange rate), or the next day (for the S&P 500 index) I will give you $17 back. If it falls, I keep your $10.”

This is called a binary option because the payoffs are binary. You either win or you lose. You cannot lose more than you paid ($10 in this example). In that sense this is less risky than a normal financial option, where the potential loss is unbounded. Of course, the potential gain is also bounded in that it cannot be more than $7 according to this contract.

I recognize that the payoff amount of 70% of the original “investment” may seem arbitrary, but consider this.  Let’s look at daily changes in the closing level of the S&P 500 index since the start of 2009. This value ended the day up (above where it started) roughly 53.4% of the time. I choose this starting point because the great recession caused unprecedented volatility just before that point.

For a point of comparison consider a simple bet on a roulette wheel in which you give me $10 when the ball lands on Red and and I give you $7 when the ball lands on Black. But the number of Red slots and Black slots is not exactly the same. We set x% of the slots to be Black. The expected payoff to you on this bet is $7 * x% – $10 (1 – x%). This payoff is $0 if x is at or below 58.825%. So if fewer than 58% of the slots are Black this is a losing bet (in expectation). What if I set x = 53.4%? This would be having about 37 Black slots and 32 Red ones. Betting on finishing in the Black is a losing bet most (but not a huge percentage) of the time because 53% is a bit less than 58%.

Here is the key insight. This so-called investment in a binary option has exactly the same payoff structure as my obvious gamble. (It looks like a duck.) I have done experiments looking at closing levels for the S&P 500 using daily data and found the following. The direction of the market movement over each of the 1, 2, 3, 4, etc. previous days tells me nothing about the direction for the following day. (It swims like a duck!) One more thing. The person offering the contract can change the payoff amount for each new “investment” on a daily basis. This is key because most “investors” use some standard tools from technical analysis to make the prediction. Since the party offering the contract knows this, they can adjust the payoffs for each new bet assuming that you will use these tools to skew things a little more to their advantage. They know that you are looking for a particular pattern in the closing values. If they see that pattern, they change the payoff amount in anticipation of hearing of a lot of bets coming in on one side. (It quacks like a duck!) Therefore, I conclude – this ain’t a damn investment. Its simply gambling.

You may argue that as long as both parties know what is going on, so what? Let grown folks gamble if they want to, and I tend to agree. But wait, there’s more.

When you open an account on a Binary Options trading site, you will almost always be given a “bonus payment”. For example, if you deposit $100 in the account you will be given a credit for another $100. That way you have $200 to play with. There are 2 small catches. First, you will be given this bonus whether you want it or not. Second, the payoff vector changes if your total “investments” are below 20 times this bonus amount. Each contract is for $10. Consider an example in which you buy 50 contracts costing a total of 50 * $10 = $500, and you find that your balance is now $150. Good job. If you wish to cash out at this point, you do not get $150. You get $150 – $100 = $50. You are not allowed to withdraw your “bonus” money because you have not “invested” enough times. You can only get a payout of $150 if you have bought at least (20 * $100)/10 = 200 contracts. If you place fewer than 200 bets you owe then the “bonus” money back.

Why does this matter? If the wheel is slightly unbalanced, as we have set it up here, you have a roughly 45% chance of winning on a single randomized selection. But if you have to place 200 bets, the odds of you winning on aggregate are approximately 0%. This is referred to as the law of large numbers. The average over many random outcomes will converge to the mean over time. But wait, there’s more!

When you create this account you will be given some “training” free of charge. You will be shown a collection of basic technical analysis models. You will be taught about fancy sounding things like Simple Moving Averages, a Relative Strength Index, and Bollinger Bands. You are free to use these “great tools” to help you make your “investments.” Of course, the site that taught you these tools knows what you know, and will anticipate that you will use these simple tools to make your “investments”. If they see that these tools suggest a certain bet for the following day, they can anticipate this and adjust the payoffs in their favor.  But wait, there’s more!

If you are leery about doing this with real money they can set you up with a “demo” account and invite you to work in this account for the next week. The account will use “real data” from some prior period. (How you verify whether this was ever real data or not I have no idea!) When you work with this data over the stated time period, the techniques that you were taught all seem to work quite well. Maybe you should use the same approaches with real money now. “Why not give it a try?” Now that real money is involved and actual data is realized, things don’t seem to work quite as well. This is unsettling but not a great surprise. But wait, there’s more.

In options trading there have to be 2 parties to every contract. There has to be a buyer and a seller. Otherwise, the contract cannot be executed. There is a small catch in that you never know who is on the other side of the contract. If many “investors” bet the same way and win, the website may announce that it “suspended” trade over that period because they could not get enough people to take the opposing bets. You have no way of knowing whether this is true or not. If you suspect that this is not true what are you going to do about it? The website that you are dealing with is part of a company that is not incorporated in the United States. It is most likely based someplace in the Caribbean or in Cyprus, which has become quite common because this was sanctioned by the Cyprus Securities and Exchange Commission (CYSEC) for a while. Since you keep losing when real money is in play, you may develop a suspicion that something isn’t quite right so you demand an investigation. Good luck with that. You can hire an international securities lawyer to look into it if you wish, but it’s going to cost you a hell of a lot more than your $100 investment.

Before anyone associated with this industry get insulted, recognize that I am not accusing anyone of cheating. I am simply saying that it is incredibly easy to cheat, there is a huge incentive to do so, and it is almost impossible to ever be forced to pay the money back if they get caught. You tell me what’s likely to happen under those conditions.

Again,

“If it looks like a duck, swims like a duck, and quacks like a duck, it ain’t a damn mongoose!”