How do binary options broker hedge themselves against losses?

External question — Quantitative Finance Stack Exchange Author: Richard Original post: https://quant.stackexchange.com/questions/34522 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. My question refers to the fact that, for most part, binary options are basically gambling, but not to the full extent. Due to the advanced models, capital anomalies like Momentum and possibly technial analysis, it is theoretically possible to make, at least, an educated guess about the direction of the stock price. There are quite a lot of websites out there that offer the possibility of trading binary options even if you are not an investment professional. However, assuming one website is flooded with professionals who really know what they are doing, then there is the, at least, theoretical possibility that most of them are right. How do you, as a broker, insure against that possibility? I know that it is a little far fetched, but the question was bugging me since I've encountered binary options. Thanks!

External answer — Quantitative Finance Stack Exchange Author: DataAdventurer Original post: https://quant.stackexchange.com/a/34555 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. If we are talking about brokers who making markets for https://en.wikipedia.org/wiki/Binary_option than I would guess that they aren't hedging at all. It's very common that maturities are in a timeframe of seconds or minutes. In my opinion returns are completely random in those timeframes.