Binary options have exploded in brandon lewis g2 review popularity over the past five years, and today there are huge numbers of different platforms and companies vying for the attention of interested traders. It’s interesting that binary brokers typically describe the profit potential of their products using percentage returns. This tends to conceal the over-round, the inherent profit for the broker built into every binary trade. There are a number of possible reasons for doing this, ranging from the innocent to the shady:
* Using percentage returns provides traders with terminology they’re already familiar with.
* Percentage returns are associated with investments rather than gambling.
* Hiding the over-round makes brandon lewis g2 review binary options look more profitable than they really are.
Read on to gain a full understanding of how binary brokers really make their money and to take a hard look at binary trading’s profit potential as compared to roulette.
How The Over-Round Works
The Over-Round is one common name for the profit margin enjoyed by individuals who take bets. Let’s start with basic probabilities. In any event with different possible outcomes, the odds of all those outcomes need to add up to 100 percent. Adding in a profit margin drives the sum of probabilities over 100 percent, and the excess is where the over-round comes from.
Higher over-rounds translate into more profit for the book-maker. It also means that the likelihood of a bet coming out in favor of the better is lower.
To give a concrete but easy to follow example, consider a brandon lewis g2 review boxing match between two fighters who are, in all ways, evenly matched. Each fighter has an equal chance of winning, which can be represented as 50 percent of the possible outcomes. Add both boxer’s chances together and you get 100 percent. A betting event where two parties have an equal chance of winning goes by many names in different parts of the world. Call it “Evens,” “Even Money,” 1.0 (favored in China), -1.0 (favored in Malaysia), 2.0 (favored in Europe), or 100 (favored in the US) – it all boils down to the same probability.
No book-maker would actually offer bets at Even Money for all outcomes, because then he would earn nothing for his services. This is why the over-round routinely drives betting probabilities over 100 percent. In an even match-up like the hypothetical boxing match described above, a book-maker might offer 10/11 odds (AKA 11/10 on) for each fighter. This provides the book-maker with a guaranteed profit. Converted into probability figures, 10/11 translates into 52.381 percent. If both boxers get these odds, then the probability total is 104.762 percent, with the 4.762 percent representing the book-maker’s profit.
Relating Percentage Return To Over-Round
A binary option is surprisingly similar to a two-outcome bet. Here you have two possible outcomes, called “Over” and “Under” or “Call” and “Put.” 50 percent probabilities are extremely common in binary trading, especially if we assume the Efficient Market Theory is at work. The market signals being tracked are either going to go up or down.
Binary options aren’t offered to traders with fixed odds like the boxing bets discussed above, though. They’re priced in percentage returns, so a little bit of mathematical translation is required. To go back to our 50-50 even chance bet, our hypothetical book-maker would describe an even money as one that delivers 100 percent return.
Now let’s pull some numbers out of the brandon lewis g2 review promotional material of a leading binary broker. One particularly popular brokerage offers a percentage return of 71 percent for over and under trades. We can convert this into a probability figure by dividing it by one hundred, adding one two it, and then dividing one by that resultant figure. Do these calculations, and you get a probability of 58.48 percent. Since we have two possible outcomes, we double that figure to get 116.96 percent, of which 16.96 percent represents the brokerage’s over-round. In other words, the broker is taking a 17 percent bite out of every “trade” his “traders” place with him and distributing profits from the remaining funds.
Binary Vs. Roulette
Whether or not it’s fair to consider binary options trading as a form of gambling is an argument that’s been fought out bitterly many times before, and it’s not going to be solved here. However, the math described above is entirely valid and impossible to run away from. Trading binary options involves giving up a certain percentage of the total potential profits to pay your broker.
How does it compare to the house’s over-round if you decide to play roulette at a casino instead? The probability of hitting red or black on a roulette wheel is 48.65 percent. Casinos treat this bet as even (50 percent probability) instead, deriving their over-round from the difference. That gives them a whopping over-round of 2.7 percent on each spin of the roulette wheel.
Just keep those two over-round brandon lewis g2 review figures in mind – 16.96 percent versus 2.7 percent – if you want to decide whether a casino or a binary broker is a greedier entity to do business with.