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AAII Investor Update: Binary Option Contracts, A Really Bad Idea

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Investor-Update

Companies are very aware of our tendency, as humans, to overestimate the odds of making money. They use this to their advantage by pitching products and services as money-making opportunities that in reality are highly effective tools for separating us from our money.

One bad idea for a financial product brought to my attention in recent months is binary option contracts. These are securities whose final price is solely determined by whether stock indexes, commodities, currencies and bitcoin close above or below a certain level. There also event-driven contracts such as whether the weekly jobless claims and nonfarm payrolls will be equal to, more than or less than a prespecified amount. The option contracts are binary because they settle at either $0 or $100. Provider Nadex gives an example: “Will the price of gold be above $1700 at 1:30pm?” You buy the contract if you think the answer is yes and sell the contract if you think the answer is no. At the end of the day, the week, or a specified time, you either make a profit or lose everything you spent (which can vary between $0 and $100 per contract).

Technically, this is a form of investing. Describing it as a form of speculating is more accurate. And there is a very thin line (though often a legal one) between speculating and gambling.

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AAII Sentiment Survey

In a reversal of last week’s movement, bearish sentiment jumped while neutral sentiment plunged. More about this week’s results.

This week’s results:
  • Bullish: 28.5%, down 1.0 points
  • Neutral: 41.6%, down 7.7 points
  • Bearish: 29.9%, up 8.7 points
Historical averages:
  • Bullish: 39%
  • Neutral: 31%
  • Bearish: 30%

Take the Sentiment Survey.

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The Week Ahead

Nine members of the S&P 500 will report earnings next week: FedEx Corp. (FDX) and Oracle Corp. (ORCL) on Wednesday; Accenture plc (ACN), General Mills (GIS) and Red Hat (RHT) on Thursday; and CarMax (KMX), Carnival Corp. (CCL), Darden Restaurants (DRI) and Lennar Corp. (LEN) on Friday.

The Federal Open Market Committee will hold its final meeting of the year starting on Tuesday. The statement and committee forecasts will be released at 2:00 p.m. ET on Wednesday. Chair Janet Yellen will hold a press conference at 2:30 p.m. (The Fed last raised its federal funds target rate on June 29, 2006.) Richmond President Jeffrey Lacker will speak later in the week, on Friday.

Elsewhere on the economic calendar, the November Consumer Price Index (CPI), the December Empire State manufacturing survey and the December housing market index will be released on Tuesday. Wednesday will feature November housing starts, November industrial production and capacity utilization and the December PMI manufacturing index flash. The December Philadelphia Federal Reserve manufacturing survey will be released on Thursday.

Friday will be a quadruple witching day, with both option and futures contracts expiring.

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