Binary options: We trade expectations …

When I hear someone say that they trade, the speech sounds truncated. Something is missing or sounds cut-off. To trade is to exchange a thing of value, x, for something else of value, y. One hopes that what you receive in the exchange is greater in value than what you gave up.

The thing or stuff that you gave up should represent energy expended in drilling for, harvesting, researching, extracting, or otherwise developing. The energy expended could include doing research, diving for oysters, mining coal or copper, or farming.

Later, energy is expended in packaging, marketing, and distributing the encapsulated energy in return for a currency that again provides some benefit that is greater than the aforementioned energy expenditure.

Let’s be honest. We do not clearly see this concept underlying the term “binary options trade.” Binary options traders are not digging for gold, copper, or coal. Binary options traders are not diving into the ocean looking for oysters or dropping nets into the ocean seeking to catch fish. Instead, binary options traders are entering “yes” or “no” contracts where we trade expectations.

I may buy the probability that an event, the closing price of a currency pair greater than z at time p, will occur. Or I may sell the probability that the closing price of the currency pair is less than z at time p. Either way, I am agreeing or contracting to exchange or receive cash in the event of either occurrence.

There is an exchange or trade of expectations. The trader should keep this in mind; that they are buying or selling expectations as part of an agreement or contract. But does this mean that we are simply placing bets? Does this mean that unlike the miner, fisherman, farmer, or diver, that we are not expending energy that can be encapsulated into a product and sold? Not necessarily.

Like any other trader, the binary options trader has to do her homework. She needs to pay attention to data and narrative transmitted by central banks. She should have command of the price purchasing parity concept. She should understand the human behavior of traders as reflected in her charts. She should understand the geopolitical environment that may impact price movements.

The energy the trader expends is reflected in her buy/sell behavior. As long as we understand that our homework represents energy expended and later encapsulated in our buy/sell decisions, then we know that we are not merely making bets.

We trade education, encapsulated energy, and expectations.

Alton Drew

6 September 2023

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