The binary options business is quite new to the online trading sector. It is therefore constantly evolving and proposing new instruments and functionalities. If you took a look at our different broker reviews and visited different websites offering binary option trading services, you probably noticed that most of them are proposing a return on loss or refund functionality. What is a return on loss? How it is calculated? Which brokers are offering such functionality? In the below article, we try to give a comprehensive and illustrated answer to the above questions.
Return on loss: definition and advantages
The “return on loss” is a specific term used in the binary options trading business that designate the percentage of your initial investment that you can actually recover even if you traded in the wrong direction. It is a partial refund of your investment in the event the underlying asset evolves against your initial scenario. You can only claim this “return on loss” if your binary option expires “out of the money”. In such condition, you don’t lose your entire invested cash but get back a percentage of it that corresponds to the “return on loss” rate.
Most of the time, this “return on loss” will take the form of a percentage that will make it proportional to the cash amount you initially invested. These returns on loss range from 10% to 15% and are generally displayed next to the return associated with the binary option. The principal advantage of the returns on loss is that it enables you to reduce the risks incurred when you trade in binary options.
Return on loss: example
A concrete example speaks for a thousand words. We will detail below a concrete situation in which the return on loss functionality can be used and how it affects the payoff of your binary option.
Let us suppose that you are bullish on OIL and you BUY a HIGH binary option on Oil with a maturity of 30 minutes. The broker proposes a return of 80% and a return on loss of 10%. You invest a cash amount of 100 GBP.
At maturity, if OIL price is higher than the initial price at the inception of the transaction, you earn the return. Your trading account will be credited with your invested amount (100 GBP) and the binary option profit (80 GBP).
Now if you invested in the wrong scenario and OIL price at maturity is lower than the initial price, you will not earn the return. Nevertheless, you will not lose the totality of your invested amount. Your trading account will be credited with the return on loss (100 x 10% = 10 GBP) and you will only generate a loss of 90 GBP. If there was no return on loss functionality associated with your binary option, you would have lost your entire invested amount.