Another one of the newer forms of trade that we can make is a Binary Bet found at IG Index These trades can be placed on Shares, or FX (Foreign Exchange - money to you and me) quotes.
They are similar in style to that of Fixed Odds with the ability to limit your risk with a fixed return on particular outcomes to that trade, such as the FTSE to be down on the day or the DJIA (Dow) to be lower at the close. As with most trades you can close the trade early whenever you like.
It's actually relatively simple as there are only ever two outcomes which are either 'true' or 'false' or depending on your way of thinking, 'yes' or 'no'. Let me explain.
Say you open a Binary Bet for the FTSE to close up (be higher than its opening price) on the day (close of business at 4.30pm), there are two outcomes as follows:
You either win or lose, there is gray area of making a few points of profit or indeed a spread. The key difference between making a Binary bet as apposed to making a Fixed Odds bet, is that you can close the Binary Bet when YOU want. With Fixed Odds you do have to wait for that trade to expire. Which means you will be either able to cut your losses or take profit early without having to wait for the market to close. As the spread betting company (or broker or bookmaker - depends what you want to call them) tend to quote a continuous price, similar to that of Spreads.
As the prices are quoted continuously you can decide to go Long or Short on any price that is quoted. Binary bets tend to fluctuate quite a lot, especially prior to expiry but you are safe in the knowledge that you know you risk exposure and your possible reward.
The type of Binary Bet that you can place are as follows:
Quite simple really, you either decide if the market is going to be up or down on the close of business that day.
Range bets simply have two prices that create a lower and an upper range which will create one out of two outcomes.
I have taken the following from the IG Index website as it's a good example of how a Binary works. Other sites have tended to make it sound too complex.
Example: 'Buying' a FTSE 0/-10 Binary.
It is 4.17pm, and the FTSE 100 Index currently stands 11.6 points higher than the previous afternoon ís official closing level. You are not confident that the FTSE will be able to hold on to the days gains, and see that our price for a Binary bet on the FTSE finishing down by 0 to 10 index points is 6.6/9.2.
So you buy the FTSE 0/-10 Binary for £20 at 9.2.
At this point you know precisely your maximum potential loss: if you are wrong and the Binary makes up at 0 you will lose 9.2 x £20 = £184. You also know that if you are right your return on the bet will be (100 x 9.2) x £20 = £1816. This represents nearly a 1000% return on your risk, decided in the next fifteen minutes.
Eight minutes later, the FTSE has dropped back slightly to 2.4 down on the day, and our quote for the FTSE 0/-10 Binary has risen by over 40 points. You think there may be some more market shifts to come, and decide to take your profit now. You close out your bet at our bid price of 48.8.
Your profit on the trade is:
Closing level 48.8
Opening level 9.2
Difference 39.6
Profit: 39.6 x £20 = £792
You were right to be concerned, as the FTSE returns to positive territory in the final minutes of trading, closing 6 points up. The FTSE 0/+10 bet settles at 100 while all remaining Binary bets in this package settle at 0. By taking your profit early you have made a 430% return on your risk, and all in the space of a few minutes.
Binary bets do have a place in our trading arsenal and are a welcome addition to the products that we can market.
Predominantly Binary trades are good for trading 'bounces', I will be explaining what a bounce is much later in the course, but for now, a bounce is simply where a stock reaches an excessive position whereby we can judge to a good degree when the stock will 'bounce' up from a position, or down from a position. This style of trading is best suited to volatile stocks, trading over a very short term period. Mostly less than a day.
