A binary contract resolves against a yes-or-no proposition, according to the SEC and CFTC’s investor explanation. Buying several propositions can create several positions without creating independent sources of risk. WFN’s numerical example below shows how the probability of two losses changes when the outcomes share the same underlying event. SEC/CFTC Investor Alert: Binary options and fraud
Follow the evidence
Trace how the event could reach markets, then inspect a competing explanation.
Compare explanations
Switch lenses to see what each account explains—and what remains uncertain.
WFN worked example: suppose two hypothetical positions each have a 50% probability of losing the full stake. If their loss events are independent, the probability both lose is 0.50 multiplied by 0.50, or 25%. If their loss events are perfectly linked, both lose together with 50% probability. The individual loss probabilities are identical in the two scenarios. The distinction changes the pattern of outcomes, even though the expected count of losing positions remains one. Independence allows mixed outcomes in this simplified example; perfect positive linkage produces two wins or two losses together. These are probability calculations from stated assumptions, not estimated odds for any live market or a claim about achievable returns. A common driver need not make two real contracts perfectly linked. Different thresholds, times, data sources and settlement clauses can produce partial overlap. The appropriate review starts by comparing those terms. Two contracts referring to the same asset on the same day deserve that comparison before they are counted as separate diversification units.
WFN worked example: suppose two hypothetical positions each have a 50% probability of losing the full stake. If their loss events are independent, the probability both lose is 0.50 multiplied by 0.50, or 25%. If their loss events are perfectly linked, both lose together with 50% probability. The individual loss probabilities are identical in the two scenarios. The distinction changes the pattern of outcomes, even though the expected count of losing positions remains one. Independence allows mixed outcomes in this simplified example; perfect positive linkage produces two wins or two losses together. These are probability calculations from stated assumptions, not estimated odds for any live market or a claim about achievable returns. A common driver need not make two real contracts perfectly linked. Different thresholds, times, data sources and settlement clauses can produce partial overlap. The appropriate review starts by comparing those terms. Two contracts referring to the same asset on the same day deserve that comparison before they are counted as separate diversification units.
A simple exposure map groups positions by underlying asset, event, expiry and settlement source. It then asks what combination of outcomes would cause several positions to lose together. This editorial method can reveal a concentrated scenario without assigning a precise correlation coefficient unsupported by the available data. Include stake sizes and contractual costs when translating that scenario into money. If two hypothetical 100-unit stakes both lose fully, the combined stake loss is 200 units, before any separately specified costs. Several small tickets can therefore accumulate one substantial exposure. The useful lesson is to inspect the shared event structure rather than rely on the number of contract names as evidence of risk reduction.
Count the underlying exposures as well as the contracts
Investor.gov describes diversification as spreading money across different investments in the hope that strength in some offsets losses in others. That is a general investment concept, not a guarantee for a binary-contract portfolio. Applying it here requires examining what drives each proposition and whether the possible outcomes overlap. SEC Investor.gov: Diversification definition
The binary payoff definition supplies the contract’s terminal structure; it does not supply a measured probability or establish independence between contracts. Contract terms identify the proposition being tested. Estimating its likelihood or its relationship with another proposition requires separate assumptions or evidence, which should be labeled accordingly. SEC/CFTC Investor Alert: Binary options and fraud
A worked example with explicitly assumed probabilities
WFN worked example: suppose two hypothetical positions each have a 50% probability of losing the full stake. If their loss events are independent, the probability both lose is 0.50 multiplied by 0.50, or 25%. If their loss events are perfectly linked, both lose together with 50% probability. The individual loss probabilities are identical in the two scenarios.
The distinction changes the pattern of outcomes, even though the expected count of losing positions remains one. Independence allows mixed outcomes in this simplified example; perfect positive linkage produces two wins or two losses together. These are probability calculations from stated assumptions, not estimated odds for any live market or a claim about achievable returns.
A common driver need not make two real contracts perfectly linked. Different thresholds, times, data sources and settlement clauses can produce partial overlap. The appropriate review starts by comparing those terms. Two contracts referring to the same asset on the same day deserve that comparison before they are counted as separate diversification units.
Review combined loss under shared scenarios
A simple exposure map groups positions by underlying asset, event, expiry and settlement source. It then asks what combination of outcomes would cause several positions to lose together. This editorial method can reveal a concentrated scenario without assigning a precise correlation coefficient unsupported by the available data.
Include stake sizes and contractual costs when translating that scenario into money. If two hypothetical 100-unit stakes both lose fully, the combined stake loss is 200 units, before any separately specified costs. Several small tickets can therefore accumulate one substantial exposure. The useful lesson is to inspect the shared event structure rather than rely on the number of contract names as evidence of risk reduction.