What are Payouts?
In binary options, payouts are the earnings that a trader gets by investing and winning bets in the binary options market.
How are Payouts Calculated?
Most binary options platforms usually indicate the percentage that a winning trade will attract. The payout is then a sum of this profit percentage and the investment amount.
For instance, if a trader invests $100 into a trade with a 75% winning stake, then the payout for this trade if it ends in the money is $100 + (75% of $100) = $175. So the payout for this trade is $175.
Payouts Between Trade Contracts
Different binary options contracts have different payout rates. Generally, most binary option contracts pay between 65% and 90% on trades. There are some brokers that offer the opportunity to get a refund of the invested capital if the trade ends up a loser. This percentage refund is now subtracted from the invested amount, and will affect the eventual payout. A trader may opt not to accept the refund. So when setting such a trade, a trader may opt for a full payout possibility (e.g. 80:10 or 80% profit, 10% refund for a 90% profit trade) or get the payout in full (90:0 or 90% profit, 0% refund).
Some contracts such as the High Yield options (High Yield Touch on SpotOption platforms or High Yield Boundary on Tech Financials platforms) offer payouts of up to 500%.
The exact payout for a trade differs from one broker to the other.
What Payouts Do you Go For?
In the binary options market, traders are sometimes caught in between trying to hit sone big major payout, and aiming for several of the smaller payouts. One way to open your eyes as to what payouts you should be gunning for is to use a very easy illustration, a little Mathematics and the rest is up to you.
Let us take the case of a Trader JB, who is on a binary options platform that offers a run bet. This run bet aims to pay the trader 10 times his investment if he is able to predict that the last number of the price within the next five ticks of the asset he is trading will end in the number 5. He has no strategy in place to determine that the price of the asset will get to his desired goal, but he has a hunch that since the price of the asset being traded is 1.2899, and 9 is closer to 5, mother luck may just smile on him. He decides to invest $100 in order to get a huge payday of $1,000. Smart guy eh?
There is another trader named Trader Jane, who is also on the same platform. However, she decides that the run bet is just too risky for her, and she decides to trade a Touch/No Touch trade on the same platform that offers an 80% payout. She also decides to invest $100 into her trade, knowing that her payout will be $180 (capital + profit). Her trade tool is using a chart pattern that shows a continuation of the price of the asset in the chosen direction.
The question is: which of these two traders is most likely to get to their goal? To answer this question, let us look at the odds of the market in each trader’s favour. Remember this is the fixed odds market, right?
Trader JB is betting on the next five ticks landing on his chosen number out of 0 to 9. This is a 1 in 10 chance of getting the bet right, or a 10% chance of profiting from this trade. Odds of losing: 9: 1.
Trader Jane is betting on the price of the asset touching a strike price, and she has a strategy to pull this off. She may or may not get to this target, so her odds are 50:50.
The fact is that 98% of traders who play the run bets eventually lose all their money. Even if they make it once or twice, they are drawn by the allure and then luck runs out on them. Part of the problem is that there is no way to monitor the pricing of the asset to see if the brokers manipulate this, so invariably, losses will occur. I am yet to meet a single trader claiming to be a winner with the run bets. Besides, 10% out of 100 in any test is always a failing grade.
On the other hand, a Touch/No Touch trade can be played with a strategy. All the trader needs is a touch on the strike, and if you have been following our blog, you will see countless strategies that we have used to illustrate how to win this bet type. Besides, a score of 50 out of 100 may not be that high, but it is a pass in any test.
Lesson: It is better to aim for lower payouts with surer trades, than to aim for high payouts with less certainty in the trade result.