Binary Trading and Binary Options
Binary trading or binary bets as they are commonly referred to are an emerging market that unlike forex is quite easy to understand, and would be well suited for beginners to the trading world. With binary trading, the trade can effectively bet (for instance) on the price of oil going up or down in a given time period. Or, they could bet on an individual stock going up or down in a given time period. In fact traders can use binaries to bet on a range of stocks, all main currency pairs and commodities at a fixed risk level. Binary trading present a unique opportunity to trade that offers consumers an advantage by researching and leveraging information and opportunities.
With binaries you can profit from up, down and even sideways moves…
A number of spreadbetting platforms and independent brokers now offer the opportunity to trade binary options across several different underlying assets including forex, commodities and individual shares. These can be an attractive trading tool for those who have a reasonable grasp of high-probability market movements and often useful for those situations where it may be difficult to define an exit for a trade that you are almost certain will be profitable.
Binary options are also know as either digital or all-or-nothing options. Binaries are simple yes or no propositions and allow speculators to profit from rising, falling or even sideways markets; they allow you to take a punt on the probability of a particular event happening with a set timeframe. This could be whether an index will move higher or lower or say whether a currency pair will touch a particular level or whether the price of a commodity trading within a set range.
For instance, is a market going to end positive or negative at the end of the trading day? This appeals to certain investors because they know their exposure from the outset – they trade between a band of 0 and 100 and the maximum they stand to lose amounts to their stake. The price of the bet is displayed as an index of probability, with a reading of 100 indicating the event will, or has happened, and ‘0’ that it will not or has not.
Each binary trade carries a statement associated to the proposition like ‘“FTSE 100 to finish up” and is priced between 0 and 100 points, closing at 100 points if the statement proves true, or at 0 points if the statement proves false. For example, if the FTSE 100 index ended the day above its opening session level, then an investor would stand to win the difference between the buy price of the bet and 100. Taking a buy price of 52, and an investor buying the “FTSE 100 to finish up” binary bet for £20 a point, the net profit would amount to (100-52) x £20, or (48 x £20) = £960.
Let’s take another example. If a provider believes, for instance, that gold has a 45% likelihood of increasing from a present price of $1,645 to close above $1,650 at the end of the trading day, for example, it could quote a price of 44-46. This means that the binary trader could buy the bet at 46 and – all things being equal – sell it back for 44. Throughout the lifetime of the bet, the price will fluctuate according to the likelihood of the event happening or not. If the gold price starts falling, the price of the bet will approach towards the 0 level but if the gold price rallies towards $1,650, then the price of the bet will approach 100. Once the binary bet expires, it will either settle at ‘0’ (gold did not exceed $1,650 at expiry) or 100 (gold did exceed $1,650). Of course if a trader thought that an event might not happen, he can also choose to sell as opposed to buy a bet, in which case his profit or loss will be calculated by subtracting the bet’s closing price from its opening price and multiplying
that by the size of the bet.
In reality they are effectively betting on on fixed odds markets and on events that will either happen or not; such as the FTSE to finish higher by between 10:00 and 11:00 or on the day. They operate by allowing participants to place a basic bet on whether the market will close above or below the current ‘strike price’ at a predetermined expiry time. Profits can be anywhere between 60-400% depending on the underlying asset and the expiry time of the trade. Spreadbetters should really ignore the associations with the word ‘option’ being linked to high risk, high value contracts traded over a monthly timeframe. In fact, binary options risk and reward is already predetermined before you have even placed the bet. This risk reward ratio is reflected as a percentage of your stake and can vary depending on the broker and the underlying asset that you are trading.
One advantage that binaries have over directional speculative instruments like spreadbets is that you can still make a substantial return even in stagnant markets. In a nutshell, a small move in a market might only translate to a small gain in a spread bet, but in a binary it could lead to very large and quick gains since with a binary the payout is just based on whether a market will move up or down, irrespective of the extent. A range bet is one way to actually one way to profit from non-trending markets, as the bet wins if underlying prices remain within two particular price barriers throughout the lifetime of the bet.
Many of the binary operators are based in Cyprus. These include the likes of Magnum Options, which offers up/down and one-touch binaries with expiries as short as 60 seconds. The markets available vary from day to day, but can include anything from sugar to JPY/USD, France’s CAC 40 index and Barclays (BARC). 24option offers high/low, boundary and one-touch options on indices, commodities, stocks and more than 70 currency pairs. Banc de Binary offers a wide variety of commodities, currencies and indices plus individual shares in well-known companies like Walt Disney (DIS:NYSE), Apple (AAPL:ND_) and Goldman Sachs (GS:NYSE). As well as up/down and one-touch binaries, it offers custom options with expiries starting from 60 seconds.
Many specialist binary option brokers will be able to offer very short expiry times for your bets. This can be very attractive for intraday traders whereas large spreadbetting brokers such as IG Index will have a fixed expiry time for forex markets at 8pm each day. Depending on your individual trading style, the expiry time can be applied from as little as 1 minute (this is provided by Traderush.com) to a 1 month expiry time. Although these expiry times are often fixed for the duration of the trade, some specialist binary options brokers also offer a tool to close a position before the expiry time has elapsed or to roll-over a position to the next expiry time (such as optionbit.com). This allows options to be closed early when they are in profit so as to benefit from the interim price movement or for the life of the trade to be extended in the hope that it will move favourable with you in the future.
Binaries are typically short-term trades and appeal mostly to day traders. Binaries appeal to trade as they are very fast moving yes/no propositions that permit speculators to bet on the performance of an asset over a pre-determined timeframe with just two outcomes – win (settling at 100) or lose (settling at 0). Some spread traders tend to utilise binaries to take contrarion positions in the market, like three hours into the trading day the FTSE 100 is down 35 points but they feel it will reverse those losses. The binary ‘up’ bet is likely to be quite cheap so this could be an interesting risk/reward proposition.
‘Had another go this morning with the 5-minute FTSE binaries. Using upbets from under 10 and downbets from over 90 with no regard for charts or any other indicators. Eleven trades. Nine losses at under 10pts each. Two wins at over 90pts each. Net gain 124.5pts. Playing those short term binaries (5 minute sessions but only the middle 4 minutes accessible to trade) doesn’t involve any clever awareness of market mood. It’s more to do with capitalising on the minor random twitchinesses that most traders would normally ignore or want ironed out, and deliberately ignoring almost everything else ;o) But with a few rules that differentiate it from mere coin-tossing…’
The returns that you can make will be determined before you place the bet as is the level of risk that you are exposed to. These are fixed values and make binary trading one of the most transparent forms of trading. There will be no nasty shocks from slippage or liquidity issues and you will never become trapped in a negative position. As the name suggests, it is an all or nothing bet; either the option expires in the money or out of the money. The only neutral scenario will arise when the value of the underlying asset closes at precisely the same level as the strike price on opening. This will result in you receiving your initial investment back in full.
An example of a binary option is a 70% return on a £100 stake on gold closing above the strike price in one hour’s time. If gold did close above the strike price then the winnings would be £170 on the initial investment. If, however, it closed out of the money you would likely only receive 10-15% of your original stake (known as the protection rate) so in this case it would result in a loss of £85-90.
‘Playing those short term binaries (5 minute sessions but only the middle 4 minutes accessible to trade) doesn’t involve any clever awareness of market mood. It’s more to do with capitalising on the minor random twitchinesses that most traders would normally ignore or want ironed out, and deliberately ignoring almost everything else ;o) But with a few rules that differentiate it from mere coin-tossing.’