A new concept in financial spreadbetting was launched in the United Kingdom in 2003 when IG Index introduced Binary Bets. This was followed by CityIndex who in April 2004 launched their own binary betting platform - Binexx - again solely for binary betting; although City Index has now exited this business.
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In much the same way as traditional financial spread betting, a binary bet has a continuous two-way price quoted (Bid and Offer) and your stake is in £'s per point. However, the prices are not based upon the underlying price of the instrument, but upon the likelihood (odds) of an event occurring and, therefore, is quoted between 0 - 100. The greater the chance of the event occurring then the higher the quote and vice versa. For example, you may see a Bid/Offer price on the FTSE 100 Index to finish higher on the day at say 80-84 (i.e. the 'odds' are quite high). Of course, a time element now has to be considered, and the longer the market stays in positive territory and the closer to 4.30 pm it is, the higher the quote will be until eventually it will be quoted at 97 - 100. In other words, at this point the 'odds' quoted strongly imply that this particular event is virtually a 'fait accompli'.
A Binary Bet is so called because, if the bet runs to expiry, then it has only two possible outcomes - that the event occurs or it does it not. If the event occurs then the bet will settle at 100, and if it does not then the bet will settle at 0. So, in our example above, if you had bought the FTSE100 to finish higher on the day at 84 at £10 per point and the Index did finish in positive territory, then the bet would settle at 100 - you would win £160 (100 - 84 = 16 x £10.) If you were wrong and the Index fell, then you would lose £840 (84 - 0 = 84 x £10.)
If you disagree,
you 'sell' this market.
If you agree,
you 'buy' this market.
Binary bets allow you to 'close-out' your position before expiry to lock in ny profits or limit any losses. If you had bought a position you would Sell at the currently quoted Bid Price, and vice versa. Please note that binary betting does not allow the placing of Stop, Limit or other order types.
Binary betting is often described as a 'fixed odds' bet, expressed as a financial spreadbet and this, to a certain extent, is true. This is because the maximum gains and losses from both forms of betting are known from the outset. In comparison if you buy a normal spreadbet for the Dax to go up and don't link this to a stop loss and then Italy defaults on its debt and the Dax drops 700 point, you are potentially looking at a much bigger loss than you were expecting. In fact many traders have been attracted to the limited risk nature of binary bets because of the increased volatility in the markets. However, remember that binary betting allows early closure of your position, to 'lock-in' gains or limit losses, or you can add to it if it is going in your favour. In typical 'fixed-odds' bets once the event has started you cannot change your bet, but in binary betting continuous prices are quoted right up to the market closure (expiry), and it is therefore possible to place positions with literally minutes to go.
The range of financial instruments on which a binary bet may be placed is not as wide as with traditional financial spreadbetting. However, there is enough choice to satisfy the needs of both the long-term, short-term and day trader. On the following page is a list of some of the possibilities:
Binary bets on FX (Foreign Exchange)Typically, you would be able to place bets that the currency will finish Up or Down on the previous day.
Binary bets on IndicesThey are a wide variety of possibilities with Indices, including Hourly, Daily, Weekly and even Yearly Bets on some Indices. It is usually possible to bet that an Index will finish Up or Down on its previous close or indeed it will finish in a particular range. (E.g. DOW To finish up 20-40 points.)
Other fascinating intra-day opportunities also exist. For example, opportunities are offered on Wall Street at 6pm (U.K. Time) and the FTSE100 is quoted at 9 am, 12 noon and 3 pm. Hourly quotes allow a bet to be placed that the Index will be UP or DOWN on the previous hourly close. (E.g. If the FTSE100 is quoted at 4350 at 11 am then a bet can be placed predicting UP or DOWN on this figure at 12 noon irrespective of the market being UP or DOWN on the day.)
A recent addition to Binary Betting is the One-Touch Bet where a range of prices are quoted and the bet settles immediately at 100 if the Index reaches that level. E.g. the FTSE100 index may open at say, 4400, prices may be quoted for it 'touching' 4420, 4430, 4440 etc. to the upside and 4390, 4380, 4370 etc. to the downside.
Binary bets on StocksUsually, bets are taken for predicting the weekly movement of the share price.
Most of the above instruments and markets are available at IG Index and Binary.com.
Binary Betting is not regulated by the Financial Conduct Authority and this means that an account can be set-up, and funded, on-line in a matter of minutes with IG Index, binarybet.com and binexx.com without the need to sign the usual Disclosures, etc. Once your account is opened you will be able to navigate the trading platform and discover exactly which instruments and markets are available.
IG Index combine binary betting products within their trading platform - simply select Binary FX, Binary Indices, Binary One-Touch and Binary Stocks from the pull down menu.
Binaries allow for very short-term plays which is an attractive quality for many speculators (or I daresay gamblers). As such with these short-term trades you get an amplified level of volatility since even if the underlying market is not moving, you can still make (or lose) up to 100 points on a trade. You also have the possibility to express a view on whether market volatility itself will rise or fall, irrespective of the market direciton.
Binary Betting markets are extremely fast moving and short-term trades are very popular since here it's all about action. Prices are constantly changing and time is an extremely important factor. Some unique opportunities present themselves, particularly for the short-term trader who is in it to make a quick buck. Prices are quoted right up to the expiry point of the position and it is therefore possible to make extremely large profits in a matter of minutes. For example, if the FTSE100 was trading UP for the day, say 11 points, at 4.28 p.m. then 'odds' would almost certainly be quoted which would give an opportunity to place a bet for the Index to finish UP within the 0 - 10 range and UP within the 10 - 20 range.
All instruments would give this short-term opportunity if the underlying markets were trading in a tight range or near to its previous close etc. Remember too, though, that it is always easy to suffer losses on a larger scale - if the Index is bought at 75 the potential gains are 25 but losses 75.
All Binary Bet events have the opposite position quoted. What this means is, as in our example above, if the FTSE 100 was quoted at 72-75 to finish UP then it would also be quoted as at 25-28 to finish DOWN. The opposite Bid and Offer prices would always add to 100. Effectively, if you believe the Market will finish UP you can either Buy the UP at 75 or Sell the DOWN at 25 - if the market does in fact rise the UP bet will settle at 100 and the DOWN bet at 0, however, your profit would be the same whichever position you took - either 100 - 75 = 25 for the UP position or 25 - 0 = 25 for the DOWN Position.
To avoid confusion it is simpler, in our opinion, to always Buy the position - remember you can Buy the FTSE 100 to finish UP at 72 - 75 or Buy to finish DOWN at 25 - 28.
Another opportunity that may present itself is, when trading volatile markets, a position may exist where the market is quoted to finish UP at 96 - 99 the opposite position therefore may be for the market to finish DOWN at 3-6, therefore if you bought this position at 6 and there was a reversal in the market, a profit of 94 points could be made with losses limited to just 6 points!
Indeed, it is possible to take advantage of a number of these less likely opportunities whether on a short-term or longer-term basis. Let's say that the Dow Jones is trading at 10,500 and the Binary Bet 'odds' of it finishing the year below 8,500 are quoted at 3 - 7. If you place a position at say £20 per point for this event to occur you know that your maximum loss if it settles at expiry is £140 (7 x £20). However, if the position goes your way you could make 93 points at £20 = £1800 or if the market falls some 1000 points to say, 9,500 your position may now be quoted at 35 - 40 and you could 'close-out' at 35 for a 28 point gain at £20 = £560. This type of trading is similar to option trading where the small buy price is similar to the option premium one would pay for the right to Buy or Sell an Instrument, if a certain price level were achieved.
Binary options are options with binary or discontinuous payoffs.
For example, a cash-or-nothing call (put), pays off a fixed cash amount if the underlying asset price is above (below) a fixed level and otherwise has a zero payoff.
Asset-or-nothing calls (puts) deliver the underlying asset (or its cash value) on the expiration date if the underlying asset price is above (below) a fixed level and otherwise has a zero payoff.
Binary options are also known as "digital options" or "bet options". Cash-or-nothing options and asset-or-nothing options are also known as "all-or-nothing options."
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