Placing Binary Bets using Spread Betting

What are Binary Bets?

A relatively new trade you can place using spread betting is called the binary bet or just binary (the industry has now grown into

One of the main attractions about this new market is that you will know precisely the maximum amount you will stand to win or lose at expiration even before your contract is activated. You can execute binary bets using the stocks of firms, currency pairs and commodities, etc. as their underlying assets.

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The price of a binary bet is derived by utilizing an options pricing formula and, as such, their values are determined using methods that are very similar to those associated with fixed odds bets. Spread betting brokers offer payouts for binary bets using values of either 0 (loss) or 100 (win).

As stated, you can speculate on Forex, commodities and stocks using binary bets. Basically, if your technical and fundamental analysis concludes that the price of a particular asset is about to appreciate in value for some extensive period then you should implement a CALL binary bet. In contrast, if you have deduced that a security will decline in value before expiration then you should open a PUT binary bet. Your spread betting broker will offer you spreads upon which you can determine whether to initiate a long or short binary bet.

You will also have the option to close your bets early before their expiry times if you evaluate that such an action would be beneficial to you. For example, you could then lock-in profits or cut your losses if price is moving against your position. The main advantage of binary bets is that they enable you to minimize your risk exposure. This is because you will always know the precise amount you will lose at the outset of each trade.

With this type of bet, there can only ever be two possible outcomes at expiration. You will either finish ‘in-the-money’ and collect a pre-defined profit or terminate ‘out-of-the-money’ and lose your entire stake. Although simplicity is the prime feature of binary bets, you must appreciate that you will still acquire skills and experience to exploit them to the full.

How Binary Bets Work

Binary bets have been constructed so that they could hardly be any simpler to understand and operate. This is because there can only be two potential outcomes, i.e. true or false. Correct forecasts will produce profits while miscalculations will result in losses. There are no grey areas with binary bets.

For example, imagine that you consider that the Dow Jones Industrial Average will finish higher by the end of the day. You could attempt to exploit your analysis by implementing a daily long binary bet using the Dow as its underlying asset. As such, there can only be two possible eventualities at expiration

  1. The Dow rises by the end of the end and your bet payouts 100.
  2. The Dow drops by the end of the day and your trade settles at 0.

As you can conclude, your binary bets will terminate by paying out either 0 or 100 settlements depending on whether a predetermined criterion is accomplished by expiration. Essentially, you will either win or lose everything as binary bets do not support any intermediate results. You should note that you just need price to finish only one increment in your chosen direction in order for you to finish ‘in-the-money’. For example, if the price of the EUR/USD at opening time is 1.3300 and you execute a long binary bet, then you will collect a 100 settlement if price finishes at 1.3301 or above at expiration.

One of the primary differences between fixed odds bet and binary ones is that you have to wait until expiration for the former to close. However, with the latter you have the benefit of exiting your trades early if you assess that such actions are in your favor. This advantage allows you to take profits or cut your losses before your trade expires. During the lifetime of your bet, your broker will continuously update you with current prices.

The price of a binary will oscillate constantly as it tracks both market sentiment and the probability of the eventual outcome. As you will receive a stream of constant updates, you can open a long or short binary bet at any price that you consider is most favorable to you. Binary bets have a tendency to fluctuate especially as expiration approaches. However, despite this volatility you can always trade binary bets in confidence knowing that your risk exposure is securely capped.

Binary Betting Example

In order to acquire a deeper understanding about how binary bets function, consider the following example. Imagine that your analysis predicts that the S&P500 will rally sharply after undergoing a retraction. Your spread betting broker is currently quoting a spread for the S&P 500 to rise by the end of the day at 25:28. As you are confident in your forecast, you buy at 28 @ £10 per point.

Your profit is calculated by subtracting the opening price and closing settlement value and multiplying the resultant by your wagered amount per point. So, envisage at expiration that you were correct and the S&P 500 did finish higher than its opening price. Your binary option would now pay out a settlement of 100. As such, your profit would be (100-28)* £10 = £720. However, if you prediction had been wrong and price dropped, then your loss would amount to (28 – 0)* £10 = £280.

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