“So I’ve got to ask, if the binary options method is so great, why don’t the active managers just use that method to beat the index?”
Here is how I would answer that question.
First, binary options are absolutely pure speculations. It would be insane to invest in things that either “pan out” or turn to zero. They are thus utterly inappropriate for a “portfolio”. It is true the binary opts can be exited if they go wrong and salvage some value from them, but very very few people are ready to invest in something that either makes (let’s say) 60% or loses 80%. Fund managers would lose customers in mass numbers if they only made a few goofs.
“Regular” options can be speculations, hedges, premium collection plays, “rentals” of LT stock holdings you may own, and some may think they are excessively risky. They are not for everyone. Of course, one could say that common stock may not be for everyone. There is no single opinion that applies to all participants in the market...and I am not advocating anything, just answering your question.
The 2 main reasons why fund managers cannot be involved with options is that 1: their fund charter may very well prohibit same and 2: they cannot swing the position sizes in the options market without impacting themselves by the reduced liquidity.
Other reasons: Entry and exit spreads are (sometimes, not always) a lot wider than with most common stock. The argument could be made that it would be a fiduciary violation to engage in security speculation under that specific restriction.
The biggest, most generic reason is the options market doesn’t have the liquidity that fund managers need to manage 100K’s worth of shares positions.
Thanks for the informative reply. Of course you just destroyed my plan of opening a Binary Options Mutual Fund. :)
Having traded all kinds of options since the 1960s, I can see exactly zero economic value to the typical trader in using these 'binary' products.
Just BTW, any number of funds and fund managers are heavily involved in 'traditional' options, and have been since CBOE opened in 1973. You might want to revise your view on this subject a bit.
FReegards!