I posted a piece earlier today on Trading Common Sense that I wrote for Benzinga explaining binary options. Because Benzinga wants their writers to remain neutral, I explained what binary options are, how they work, and the pros and cons of trading them. I then punctuated the vanilla discussion with the following benign statement: “As is the case with any other financial instrument, it’s up to the individual trader to weigh the pros and cons of binary options and decide if they are a worthwhile investment.”

Nadex’s Tim McDermott (who will probably never grant me another interview…) explained his (shocking) opinion that binary options are not akin to gambling. He said that position flexibility (the ability to change the size of a binary options position as expiration approaches) is one way that binary option trading is not like gambling.

When you open a binary option position, if new information comes out, you can always add to the position or close the position before the “outcome,” or the options expiration. It’s a lot like when you’re playing poker and you can raise or fold based on new cards that have been dealt. Wait…

Say what you will about stocks or traditional options being gambling too. When you buy a share of stock, you are getting a minute stake in a real company that provides a service or product and has a tangible value. When you buy an option contract, this contract gives you the right to purchase or sell shares of stock at a given price on a given date.

What are you “buying” when you give up $10 on the roulette wheel? You are “buying” a particular outcome of the spin. You own the right to get paid if the ball lands on black, for example. This is exactly what binary options traders are paying for: an outcome. The only value a binary option has comes from how likely a particular outcome is to occur.

Finally, McDermott argues that binary options are not strictly gambling because traders make “informed decisions” based on information that is available about the underlying stocks the binary options bets are placed on. This information means that the results of the binary options bet are not strictly based on chance, such as the roll of a craps die. They are more like the bets you would place on a football game, where you can be an “informed” gambler by researching the players, the weather, the coaches- wait…

Yeah, so here’s what I couldn’t say in my Benzinga article: binary options are straight-up gambling, especially options that expire within a day or two. Unless there is some big catalyst (earnings, for example), the idea that the typical trader can consistently predict how a stock will move on any given day is ridiculous. Forget the idea that someone could consistently know which direction a stock will move over a fifteen minute time-frame!

The best I can do when it comes to binary options is say that it’s a lot like sports betting, right down to the negative expected value, or “house edge.” And I don’t know about you, but if I’m in the mood for some gambling, I’d have a lot more fun watching a college football game than I would watching a stock ticker!

I hope all my readers had a happy Thanksgiving. I was lucky enough to have some time to think about all the things and people in my life that I am truly thankful for. In my opinion, the stock market isn’t the only thing that everyone should try to keep in perspective.

Want to learn more about the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!