What Are Binary Options? A Thorough Guide to How They Work, How to Trade, and the Risks for Beginners

"Binary options trading." You may be interested, but

• "What kind of investment is it exactly?"
• "Are the risks manageable?"

Many people have these questions. This article comprehensively explains everything beginners need to know, from the basic mechanisms of binary options to the differences between domestic and overseas brokers, taxes, and risks.

[Background] What Exactly Are Binary Options?

When people hear "investment," they often think of stocks or forex, but binary options are financial products with a completely different structure.

True to the name "binary" meaning "two choices," it is a simple yet deep investment method traded worldwide.

Here, we'll explain in detail from the basic mechanics to regulations in Japan and notable overseas brokers.

[What you'll learn in this chapter]

• Binary options = a two-choice investment predicting price movements up or down
• Domestic broker regulations = stricter since 2013, minimum 2-hour expiry required

Binary Options (BO) = An Investment Style Aiming for Profit Through Price Prediction

According to the FSA's official definition, binary options are transactions that target foreign exchange rates, stock indices, etc., predicting price movements (up or down) at a predetermined point or period, selecting from two choices. In other words, binary options are a type of financial derivative trading that is officially recognized as an investment product.

That said, the trading mechanism is very simple. If your prediction is correct, you receive a fixed payout; if wrong, the option premium you paid becomes your loss - these are clear rules.

Unlike forex or stock investing where profits and losses fluctuate based on price movements, the maximum loss is limited to the invested amount. For example, if you invest 10,000 yen predicting "USD/JPY will rise in 1 hour"...

• Prediction correct -> With a 1.85x payout rate, you receive 18,500 yen (profit of 8,500 yen)
• Prediction wrong -> The invested 10,000 yen is lost

These straightforward rules of simply predicting "whether the price will go up or down after a certain time" are why binary options are popular even among investment beginners.

History of Binary Options & How They Spread in Japan

The history of binary options in Japan started in earnest around 2012. Initially, regulations were loose and short-term trading was possible, but the high speculative nature was seen as problematic, leading to a trend of stricter regulations. On July 18, 2013, the Financial Futures Association of Japan (FFAJ) established the "Rules for Handling Over-the-Counter Binary Options Transactions for Individual Customers".

Source: Financial Futures Association of Japan (FFAJ) "Rules for Handling Over-the-Counter Binary Options Transactions for Individual Customers" (PDF) As a result, the following regulations were introduced for domestic brokers:

Key Regulations

• Expiry time... Minimum 2 hours or more
• Trading frequency... Maximum 12 times per day
• Total-take prohibition... Both call and put options must be offered, etc.
• Customer knowledge verification... Must be conducted before trading begins

Through these regulations, domestic brokers operate soundly under strict rules.

What Is BI-WINNING?

With the announcement that HighLow Australia will end its service in June 2025, BI-WINNING has gained attention as an alternative service.

It holds a financial license (AVISO) officially authorized by the Panama financial authority, which provides a certain level of credibility compared to other unregistered overseas brokers.

[Beginners: Start by Learning These] Essential Binary Options Glossary

Before starting binary options, there are some essential terms you should know. [What you'll learn in this chapter]

• Payout rate = the return multiplier on winning trades; domestic uses variable rates, overseas uses fixed rates
• Expiry time = time from entry to result determination; shorter times increase difficulty
• Same-price refund = full refund system when price doesn't change (*varies by broker)

What Is the Payout Rate?

The payout rate is the return multiplier when your prediction is correct - a crucial figure. The formula is "winning investment amount x payout rate." Example: 10,000 yen investment with 1.85x payout rate

• Refund amount... 10,000 yen x 1.85 = 18,500 yen
• Net profit... 18,500 yen - 10,000 yen = 8,500 yen

BI-WINNING offers a high payout rate of up to 1.95x, however, high payout rates come with corresponding risks that you should understand.

What Is the Expiry Time?

The expiry time refers to the time from entry to result determination. This time setting significantly changes the nature of trading.

Under FFAJ rules, domestic brokers are required to have expiry times of "2 hours or more". This is a measure to reduce speculation and make it more investment-like. On the other hand, overseas brokers offer short-term trading options like "1-minute" or "5-minute" expiry, but the shorter the time, the significantly more difficult the prediction becomes.

[BI-WINNING Exclusive] What Is the Same-Price Refund (Draw)?

The same-price refund is a system where if the price at entry and at expiry are exactly the same, the full investment amount is refunded. This is a system adopted by many overseas brokers and offers the following benefits: Benefits of Same-Price Refund

• Possibility of zero complete losses
• Risk reduction effect
• Psychological peace of mind

On the other hand, with domestic brokers, even if the price doesn't move, a slight loss occurs due to the difference between purchase and refund prices.

How Does the Binary Options Tax System Work?

When you profit from binary options, taxes are unavoidable. What requires special attention is that the tax systems for domestic and overseas brokers are completely different. Here's a brief explanation. [What you'll learn in this chapter]

• Domestic broker taxes = separate taxation at a flat rate of 20.315%
• Overseas broker taxes = comprehensive taxation with progressive rates up to 55%
• Tax return = required when annual profit exceeds 200,000 yen (for salaried workers)
• Required documents = trading history, profit/loss reports, calculation statements, etc.

How Tax Systems Differ Between Domestic and Overseas Brokers

Profits from binary options are naturally subject to taxation. The most important thing to understand is that the tax systems for domestic and overseas brokers are completely different. For domestic brokers

• Tax classification... Separate self-assessment taxation
• Tax rate... Flat rate of 20.315% (income tax 15% + resident tax 5% + special reconstruction income tax 0.315%)
• Features... Calculated separately from other income, loss carryforward for 3 years possible

For overseas brokers

• Tax classification... Comprehensive taxation (miscellaneous income)
• Tax rate... Progressive taxation up to 55% (income tax 45% + resident tax 10%)
• Features... Combined with other income, loss carryforward not available

Profits from overseas brokers are treated as "other miscellaneous income" and taxed by combining with salary income and other sources.

Reference: National Tax Agency "What Are Income Tax Rates"

How to Report Profits and Required Documents

A tax return is required when annual profit exceeds 200,000 yen (for salaried workers). The documents required for filing are as follows:

Required Documents List

1. Tax return forms (First, Second, and Third Tables)

2. Calculation statement for miscellaneous income from futures trading (for domestic brokers)

3. Trading history / Profit and loss report (issued by broker)

4. Identity verification documents (My Number Card, etc.)

5. Withholding tax certificate (for salaried workers) The required filing documents differ between domestic and overseas brokers, so we strongly recommend consulting with the tax office or a tax accountant in advance.

Binary Options "Frequently Asked Questions"

Here, we answer common questions about binary options. [What you'll learn in this chapter]

• Smartphone trading = possible with most overseas brokers, BI-WINNING also supports browser-based trading
• "Sure-win" software = extremely likely to be a scam, FSA has also issued warnings
• Turbo trading = short-term trading, BI-WINNING supports from 30 seconds
• Choosing an overseas broker = license and Japanese language support are minimum requirements

Can I trade on my smartphone?

BI-WINNING supports trading via smartphone browsers, so you can trade even without a PC.

Someone on social media is trying to sell me "software that guarantees winning at binary options." Will I win if I buy it?

To put it plainly, any software claiming "guaranteed wins" is 100% a scam. Please be very careful. Typical Scam Patterns

• Promises of unrealistic returns like "guaranteed 50% monthly returns"
• Baseless claims like "AI automatically generates profits"
• Demanding expensive software fees (300,000 to 1,000,000 yen)
• Becoming unreachable after purchase

Source: FSA "Please Be Cautious When Trading Binary Options!"

Which brokers offer so-called "Turbo trading"?

Turbo trading is a colloquial term for trading with extremely short expiry times (approximately 30 seconds to 5 minutes), and it's a popular trading format offered by many overseas brokers. Due to the speedy results, it's supported by traders who want to make multiple trades in a short time. The main requirements for Turbo trading are:

• Must be an overseas broker (domestic is regulated to 2 hours or more)
• Short-term options of 30 seconds, 1 minute, 3 minutes, 5 minutes, etc. must be offered

With BI-WINNING, Turbo trading from as short as 30 seconds is available, with the following time settings offered:

Turbo Trading Precautions

• Tends to become more gambling-like
• Technical analysis is less effective
• Easy to fall into emotional trading
• Money management is especially important

While Turbo trading is attractive, the shorter the time frame, the more difficult predictions become, so we recommend practicing with longer expiry times first before attempting it.

Summary

Binary options are "two-choice price prediction investments" as defined by the FSA, and they are investment products that are easy to start with simple rules. However, regulations and tax systems differ significantly between domestic and overseas brokers - this is important to understand. When considering binary options trading, starting with small amounts, building sufficient knowledge and experience, and then moving to serious investing will be the shortcut to long-term success.