The last nail for binary options?

Driving a nail in the coffin

The Securities and Exchange Commission has hit yet another nail in the binary option coffin, and what a big nail that is.


What is a binary option? Pricing and Greeks

  • In a regular call, the payout of the option increases progressively as the underlying stock grows. In a binary option, the payout is all-or-nothing. Either your stock ends below the strike, and your payout is nil, or the stock ends above the strike, and the payout is a full $1 (or whatever you have bet). Regular and binary calls
  • No vanilla options can replicate a discontinuity. But if you trade a vanilla call spread, and the two strikes become infinitely closer, you end-up with a binary call.Call Spread approximation
  • Practically speaking, this call spread approximation  allows you to price binary calls with a slightly cheaper and a slightly more expensive call spread, and therefore find the price and risk manage the product.
  • Close but before the maturity, the delta becomes infinitely high around the strike, which means the gamma becomes increasing high then increasingly low around the strike.Binary option Delta Gamma


Where the risk really is

  • Depending on the size of your position, that high gamma can be incredibly difficult to manage. Either you are long gamma and your theta is awful, or you are short gamma and your PL can explode in a second.
  • An experienced trader often manages these options ‘at zero vol’: a few days before the expiry when the strikes are still far away, he/she moves the option into a separate book, and forces its volatility to zero. The trader takes a loss, and its option price and Greeks are off temporarily, but he/she avoids the enormous gamma and delta fluctuations in the risk management.
  • But that’s not where the true risk is. The risk is that your counterparty manipulate the stock. On an example:
    • Girl falling off a cliffLet’s say that you are short $1m of the $100 binary call, and the stock is worth $99 (slightly out of the money).
    • If your counterparty has the means and the will, then he can buy the stock at $99, and again, and again until the stock rallies to $100.10, exactly on the close – when both sides assess the value of the option. Let’s assume he bought 100,000 shares to get there.
    • Your option expires in-the-money. You need to pay $1m, which he collects.
    • The next day, the stock drops back to $99. Your counterparty has lost 100,000 x $1.10 = $110,000.
    • Net-net, your counterparty has made ~ $900k, and you have lost $1m.
  • It could be worse. In the example above, the last price has to be above the strike. There are “one-touch” options, where the stock only have to trade once for the option to gain or lose its value.
  • That scenario above is clear-cut market manipulation, for the benefit of derivatives payout. It is strictly illegal. And it happens quite often, especially if the payout is large and the counterparty much bigger than you.


The binary option scam

There is a regulated binary option business (like CBOE-listed digitals), and there is a seriously bad binary options business coming from abroad. If you are a retail trader buying or selling a binary option, and you face one of those market “professional”, what will happen?

  1. You have no clue what the true price for that option is, and you probably pay much more than the theoretical price.
  2. This is especially true if the option has only a few hours or days to go, where you have no chance of finding the true price.
  3. The sales rep will call you and lie to you until you trade your last dollar.
  4. If you are long the binary option, it has a solid tendency to expire out of the money. If you are short the binary option, it has a solid tendency to expire in the money. Guess why? Somebody may be pushing the stock/FX/etc  against you.
  5. Even if you are making a profit, the company may forget to pay you your payout, or let you withdraw your cash from your account.
  6. The company is not even be allowed to sell you these trades at the start. There is a solid regulatory environment in the US, and the providers is far abroad. In that case, good luck on getting your monies back.

This is what the binary option scandal is. Some less than fair entrepreneurs have created binary option platforms where individuals are enticed to trade products, whose dices are loaded. From 2007 until the last few years, the binary option business has flourished, and some of those binary companies have made a fortune. The option providers were often in Israel, where the regulatory environment was softer, and the entrepreneurial spirit higher.


The US regulatory outcomes.

SEC and the financial marketsThe SEC has been fighting these scams for a decade, and has brought the perpetrators to justice. Here are some of the outcomes, including the latest and most impressive catch – SpotOption:

  • June 2013: the SEC charged and won an injunction against Banc de Binary, a Cyprus-based company with selling binary options illegally to U.S. investors. Banc de Binary was offering binary options to US investors without any form of US registration. The firm attracted individuals of modest means, like an individual with $300 monthly income, fleeced of $25,000, or another unemployed investor betting his very last $1,000. Credits to Leslie A. Hakala, C. Dabney O’Riordan, and John W. Berry, with the support of the CFTC.
  • September 2019: the SEC charges Gil Beserglik, Raz Beserglik and Kai Christian Petersen, for defrauding US investors and vulnerable retirees, over tens of millions. Bloombex Options, Morton Finance and Starling Capital offered call centers in Germany and Israel, which are actually “boiler rooms”: high-pressure sales tactics, large deposits, lies and deceptions, refusals to withdraw money. Credits to Jason Anthony, Michael Fuchs, Deborah Maisel and Jennifer Leete on the investigation side, as well as Gil and Raz Beserglik, Petersen, Kenneth Donnelly and Samantha Williams on the litigation side.
  • October 2019: the SEC charged Anton Senderov and Lior Babazara for defrauding more than 2,800 U.S. investors over $5 million. LBinary and Ivory Options, their companies, owned LianTech Finance Marketing, a call center and boiler room in Israel. They never gave any decent advice to investors. Credits to Jason Anthony, Michael Fuchs, Deborah Maisel and Jennifer Leete on the investigation side, as well as Christian Schultz and David Nasse on the litigation side.
  • April 2021, and this is a big one: the SEC charged Israeli-based Malhaz Pinhas Patarkazishvili and Ran Amiran, with deceiving U.S. investors out of more than $100 million. Their company, Spot Tech House Ltd, was formerly known as Spot Option Ltd. The companies offered white-label services to other companies, who directly marketed binary options. They instructed they partners to allow only partial withdrawals, devised manipulative payout structures and reduce the chances that investor options would finish in-the-money. Credits to Deborah Maisel and Jason Anthony, Jennifer S. Leete and Melissa R. Hodgman on the investigation side, as well as Kenneth W. Donnelly, Samantha M. Williams and Fred Block on the litigation side. Other regulatory bodies also intervened from British Virgin Islands, Bulgaria, the Czech Republic, Kong-Kong, Ireland, Israel, Switzerland and the United Kingdom.SpotOption advertisement


What the Israeli press is saying

The Times of Israel reports:

  • Binary options flourished for a decade, until outlawed in 2017 by the Knesset after the newspaper’s multiple investigations.
  • SpotOption was nevertheless secretively given hundreds of thousands of dollars of government funding to expand its operations to China, between 2014 and 2016 aka during these investigations.
  • SpotOption defrauded US investors by much more than $100m, but the burden on proof is on the SEC, and they could solidly demonstrate only $100m.
  • Israel has still not prosecuted any of the thousands of employees of the binary options industry.
  • A few entrepreneurs were though, like Lee Elbaz, who was sentenced to 22 years in prison by an Israeli court in December 2019. The article is worth reading.
  • SpotOption served as a one-stop shop for “white label partners” who wished to start a binary options website. These partners directly marketed binary options to investors around the world.
  • SpotOption offered a customized, “user-friendly,” website, a content management system or “CMS,” software that allowed the brokers to create and edit content on their websites; hosting and management of their websites; customer relationship management or “CRM” software; third-party payment processing services; as well as training and other services…Outsourcing call centers
  •  SpotOption marketed to its partners that “the average investor lost 80% of their investment within five months.

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Written by Gontran de Quillacq

Gontran de Quillacq is an expert witness and a legal consultant. He is a recognized authority in options, trading, derivatives, structured products, portfolio management, hedge funds, mathematical finance, quantitative investment, strategy research and financial markets in general.


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