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You Are Here: Home > Stockmarket & Trading > Spread Betting Section > Binary Betting
Last update : November 2013
Binary Betting

What is it - How does it work

Page Summary :

What is Binary Betting, how does it work and what are its advantage and disadvantages to the Spread Better. This guide offers an explanation.

Binary Betting was developed by the Spread betting firms and is another way of speculating on the markets, and like spread betting the profits are also tax-free.

How a Binary bet works is relatively simple, read this page for more details.

What is Binary Betting
WARNING! - Only deal with this Binary Bet Broker
  • There are only a few spread bet brokers that also offer Binary Bets
  • Take care who you do business with because the broker needs the proper systems to be able to quote and manage the Binary prices effectively
  • Because of this there's only one broker to consider and that's IG Index
  • IG is by far the biggest and best in the Binary Betting market - In fact they developed it
  • Use other brokers at you own financial peril
  • For a Binary UP bet you'll be offered a price on a market such as the FTSE 100 or Gold on whether it will close up on the day
  • The binary bet be quoted anywhere between 1 and 99, perhaps 59-61
  • Taking the FTSE as an example - if the index does indeed close higher on the day (by 1 or 101 points it doesn't matter, up is up) the binary bet will settle at 100 (at the close of business)
  • But if the FTSE closes down on the day (again by 1 or 101 points) the binary bet will settle at 0
What is important to note is that binary bets work in a similar fashion to fixed odds bets offered by a high street bookie, ie your maximum profit and loss are always known beforehand. This is because the binary market cannot rise above 100 or fall below 0.
How Binary Betting works
A winning binary trade
  • Assume the market for the FTSE closing UP today is quoted at 47-49
  • You buy at 49 points risking £1 a point
  • The FTSE closes higher by 9 points that day and the binary bet is closes at 100
  • Your profit = 51 x £1 = £51 (100 points - 49 points)
A losing binary trade
  • Assume the market for the FTSE closing UP today 61-63
  • You buy at 63 points risking £1 a point
  • The FTSE is looking good into the close, it's 10 points higher with 5 minutes to go but some big sell orders push the market down in the final few minutes and the index closes 1.5 points lower
  • The binary bet will close at zero meaning a loss of 63 points
  • 63 points x £1 = £63 loss
Binary bets can also be shorted

Binary bets can also be shorted so you can back against an event happening. For example -

  • The FTSE binary bet for the market closing UP is quoted at 31-33
  • You think the market will close lower and therefore sell short at 31 risking £1 a point
  • If the FTSE closes higher the binary bet will settle at 100, if it closes lower the binary bet will settle at zero
  • Your market forecast was good and the FTSE closed 12 points lower
  • Profit is 31 - zero = 31 points x £1 = £31
Binary Bets are always being quoted
Spread betting, binary betting etc is as much about flexibility as anything. And so binary bets are always being quoted right up to when the market closes. This means you can take partial profits, losses or even dump your position before the bet expires. For example -
  • The binary bet for the FTSE closing UP is quoted at 61-63
  • You buy £2 a point at 63 and the FTSE is looking good moving steadily higher over the next few hours
  • You sell half of your position (£1) at 83 points (£20 profit)
  • But some bearish economic news is released which pushes the FTSE sharply lower
  • You sell out the other £1 of your position at 42 (loss of £21)
  • The FTSE closes down 34 points and the binary bet settles at zero
The different styles of Binary Bets
The main Binary Bets are -
  • Daily up bet - if the market closes up the bet settles at 100, if down it settles as zero
  • Daily down bet - - if the market closes lower the bet settles at 100, if it closes higher it settles at zero
  • Hourly up bet - If the market that hour, from say 10am-11am, closes up the bet settles at 100, zero if the market closes down in the time period
  • Hourly down bet - if the market that hour, say 3pm-4pm, closes down the bet settles at 100, if up the bet settles at 0
And of course in the above examples, and indeed all Binary Bets, the markets are always being quoted so profits and losses can be taken at any time, ie the position doesn't have to be taken in the expiry where the maximum profit or loss will always occur.
Special Binary Bets

As well as the traditional binary bets listed above there are other bets which are called 'Specials'. These work in the same way - you bet on an event happening, if it does the bet settles at 100, if not it settles at zero.

  • One touch - Will the market move through a certain level at any time during the bet's time period
  • Tunnel - The market has to stay within a certain hi-lo range for the duration of the bet
  • Hi-Lo - Will today's high or low be a given distance from yesterday's close
  • Ladders - Will a market be above a certain price at a certain time of the day
  • Extreme short term bets - 5 and 20 minute binary bets on the FTSE and Wall Street - incredibly volatile as you can imagine
Available markets to trade

Binary bet markets are offered on most of the big contracts such as the stock indexes, the larger and more volatile shares, foreign exchange and some commodities.

However, the range of markets offered does depend on which broker is used. Some only offer a limited range of Binaries.

Interesting Binary Betting points
They're similar to fixed odd bets
Sharp readers will have noted that binary bets are fixed odd bets in disguise. For example -
  • If you buy a binary bet at 50 risking £1 a point your maximum profit and loss is both £50
  • If you place a £50 bet at even odds via Ladbrokes your maximum profit and loss is also £50

Or

  • If you buy a binary bet at 20 risking £1 a point your maximum loss is £20 with a maximum profit of £80
  • If you place a £20 bet at 4-1 at Ladbrokes your maximum loss is also £20 with a maximum profit of £80
1 point higher/lower is no different from 1001 points

If you go down to the bookie and bet on a horse which in turn wins by the huge margin of 2 furlongs (400 meters) you won't get paid any more money. So the winning margin is of no importance, only that the horse won.

And it's similar with binary betting. You are betting on an event happening or not happening, the FTSE closing UP for example. So if it closes 1 point or 1001 points higher the winning bet still pays the same and the losing bet will still lose the same.

This is in contrast to traditional spread betting where both profits and losses are theoretically open ended. So when you're long or short you want the market to move as much in your favour as possible.

Binary prices can be very volatile

Binary bets are extremely sensitive to the price of the underlying and therefore can move very quickly, especially when the markets are volatile. New traders are advised to watch how and why the binary markets move and trade for several days before risking any capital.

Also, because Binaries can move quickly all orders have to be entered via the online trading platform and are not accepted via the telephone.

No commissions and no margin
There's no commission for dealing in Binary bets as the spread betting firm make their money off the bid-offer spread. Also, no margin is charged as the bet has a fixed risk but you will need to have sufficient money in your account to trade.
LearnMoney comment:
If you understand how to bet via a bookie you'll understand Binary Betting. The only differences are the way they're quoted and the fact the markets are quoted right up to their official closes.

But are Binary bets any good, will they suit your trading?

Some love them, others think of them as slightly gimmicky. My own personal view is simple - any tool or product that adds flexibility to the financial markets is welcome. You might not want to use them today, this month or even this year but they're just another tool for your financial toolbox, one which might come in useful in the future. It's therefore unwise to dismiss them.

Finally, although Binary Bets are a welcome addition to the spread bet arena if there's one problem with them it's their often expensive bid-offer spreads of around 5%.

Prospective traders should take note of this point as the cost of doing business is far more important when trying to generate profits in the markets than many people believe, especially those new to spread betting.

WARNING! - Only deal with this Binary Bet Broker
  • There are only a few spread bet brokers that also offer Binary Bets
  • Take care who you do business with because the broker needs the proper systems to be able to quote and manage the Binary prices effectively
  • Because of this there's only one broker to consider and that's IG Index
  • IG is by far the biggest and best in the Binary Betting market - In fact they developed it
  • Use other brokers at you own financial peril
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