A new concept in financial spread betting was launched in the U.K. in 2003 when IG Index introduced Binary Bets.
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 FTSE100 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’.
In this respect a binary trade permits traders to stake a certain amount on an event happening or not happening. As soon as the bet is placed, investors can see the maximum they stand to gain or lose. In fact the 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. Each financial binary bet has a statement linked to it, such as ‘FTSE 100 to finish up’ and is priced between 0 and 100 points. 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 FTSE 100 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).
There are also certain unique advantages of binaries over conventional fixed-odds. Binary bets allow you to ‘close-out’ your position before expiry to lock in any 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. For instance, if a binary trader bought a ‘FTSE 100 finish up’ at 20 points and the price rose to 60 points a few hours later, that client could sell the binary immediately netting him 40 points multiplied by the stake.
Having said that 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. 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 spread betting. The most popular binary markerts are the FTSE, Dow Jones and the euro/dollar currency pair. 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:
FX (Foreign Exchange)
U.S. Dollar/Swiss Franc
U.S. Dollar/Yen
Euro/U.S. Dollar
Euro/Pound Sterling
Pound Sterling/U.S. Dollar
Typically, you would be able to place bets that the currency will finish Up or Down on the previous day.
Indices
DAX
FTSE100
NASDAQ
S&P 500
Wall Street (DOW)
They 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 intraday 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.
IG has also developed ‘custom bets’ that permit clients to customise risk and expiry of the position to suit their own particular requirements, as opposed to being limited to what is offered. So for instance, if a client wished to place a bet that makes £500 if the Dow is 25 points higher than at the moment, in say, 90 minutes time, this is quite straightforward to setup at IG Index using a custom bet.
Stocks
The top 25 U.K. Stocks by market capitalisation. Usually, bets are taken for predicting the weekly movement of the share price. Most of the above instruments and markets will be available with IG Index.
Types of Binaries
One Touch: Here an investor is ‘betting’ whether a market will breach a certain price level at any time during the bet’s running period.
Tunnel: This pays off if a market stays within certain hi-lo boundaries for the duration of the bet.
Hi-Lo: With this bet a trader is aiming to profit from whether today’s high or low will be a given distance from yesterday’s closing level.
Ladders: Traders here punt on whether a market will be over a certain price at a pre-determined time of the day.
Custom Bets
Binary.com (previously known as Betonmarkets) and IG Index also provide custom bets, which permit the user to structure their own binary. If, say you wanted to try making £100 in the next 24 hours if EUR/USD is lower than $1.2550, you could build that binary easily by using some sliders on the screen.
Another binary betting provider is GFT which offers bets on a number of indices and currency pairs as well as commodities like crude, gold and silver.
Bet Expiries
In terms of binary contract expiry dates these can range from just five-minute to weekly and even monthly timeframes although the highest volumes tend to be in the markets which run for one day or less. IG has probably the most diverse range of markets including indices, currency pairs and commodities.
Of course just because a bet has an expiry date doesn’t mean that you have to hold onto it till the contract’s expiry date. You can trade in and out of the market before expiry and a two-way price is always available.
Specials
IG Index also offers binaries on certain novelty markets such as the monthly US unemployment data, the non-farm payrolls – and who will be the next US president.
Binary Betting is not regulated by the Financial Services Authority and this means that an account can be set-up, and funded, on-line in a matter of minutes with IG Index 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.
We would suggest Binary.com (previously known as Betonmarkets) and IG Index for financial binary betting and custom bets. IG Index combine binary products within their trading platform – simply select Binary FX, Binary Indices, Binary One-Touch and Binary Stocks from the pull down menu.
So, let us re-cap:
- Binary Bets have a continuous two-way price quoted between 0 and 100 whatever the instrument (E.g. Nasdaq to finish up on the day at 60 – 64, Euro/U.S. Dollar to finish higher 48 – 53)
- You Buy at the Bid Price, and Sell at the Offer Price.
- Bets are placed in £’s per point at the prevailing Bid/Offer price.
- Bets are settled at expiry at either 0 or 100. If the event occurs it settles at One Hundred (100), and if the event does not occur it settles at Zero (0).
- If you are right and the event occurs then you win 100 less your Buy price multiplied by your stake. (E.g. If you bought the Nasdaq to finish higher at 53 at £5 then you would win 100 – 53 = 47 x £5 = £235. If you are wrong you lose 53 – 0 = 53 x £5 = £265.
- You cannot place Stop, Limit or any other Order type.
- Whilst the market is open, positions can be closed at anytime before expiry to lock in profits or limit losses.
As such binaries and custom bets are very easy to understand. Taking a basic up/down bet for instance, a trader only need to enter the amount he wants to bet on one box and another box will generate a figure he will win if their prediction is proven correct and the ‘option’ expired in the money. Also, unlike spread betting, the most that binary traders can lose is their initial deposit (the amount they decide to bet).