How Binary betting works - Binary Bets

Binary bets have only two possible results - a win or a loss. Will the FTSE close up at the end of the day? There are only two possibilities, yes or no. If you think it will finish up, you will "buy". A binary bet has just two settlement prices. If the FTSE closes up, the bet settles at 100; if the index closes down, the bet settles at zero. You can go long or short any price quoted. The deposit requirement for all binary bets is an amount equal to your maximum loss on that bet. There are no running margins, as your bet is already on the table and paid for. You either win or lose, unless you exit before the close of trading.

It works like this. You visit the Binarybet site (binarybet.com) before the market opens and you will see a quote for the day's FTSE bets for the market closing up or down on the day:

• Market: FTSE to finish up.
• Bid/offer: 45-51.
• Last updated: 10am.
• Change: 0.
• High: 100 (if closes up value = 100).
• Low: 0 (if closes down value = 0).

What the 45-51 means is that if you take the sell side and bet that the market will finish down, it will cost 45 points. At the end of the day all bets finish either "0"or "100". A down close will be "0", an up close "100".

We take the sell side at 45 points and play for £20 per point, at a cost of £900. At the end of the day the market does close lower. Our bet wins and is priced at "0". Our win is what we paid (45) minus the "0", so we win 45 points by £20, or £900.

Had the market closed up and we had lost (and not closed out before the close) we would have lost our initial bet of £900. At the racetrack this would have been an even-money bet. Had we taken the buy side and paid 51 and bet $20, our cost or maximum loss would have been £1020 (51 x £20). If the market closed up, our bet would have won, so the win amount "100" less our bet price of 51 equals 49 points (100 - 51). Thus our win would be £980 (49 x £20).

Note that as the day progresses these quotes will change to reflect market movements and the odds of the market closing up or down from that time. Let's assume the Footsie by 10.30am is off 20 points. The odds will have changed and the quotes will reflect this, probably quoting nine to 15. In this case, you could take profits on your bet from 45 where it was opened and take the 15 offer to close, thus making 30 points by £20 for a £600 profit. Or you could just hang on till the close. You could do this all day if you wished.

All Binary Bets work on the same principle, however there are three different types of Binary markets, although the different markets can differ from spread betting broker to broker.

• Standard: e.g FTSE closes up for the day. These types of bets have been covered in the introduction
• One Touch: If a market touches or goes through a certain level then the bet is automatically settled at 100. Discussed in more detail below
• Range Bets: A price is quoted as to whether a market will close higher or lower than a certain level. For example the FTSE 100 will close greater than 40 points up. These bets are discussed in more detail below.

BINARY BET EXAMPLES

Standard - Winning Bet Example

• It is 6pm London time, the Dow Jones Index is down 33 points
• The market for Wall Street closing UP on the day is quoted at 24-27
• You believe there will be a turn around towards the close with the index likely to close slightly higher, you therefore go long the Binary Bet at 27, risking £5 a point
• Your maximum loss is £135, maximum profit potential is £365
• Commissions are built into the spread
• A few hours later the Dow Jones has crept back up and is now only 5 points down
• The Binary market is now quoted at 47-50
• You decide to take a profit on 60% of your position by selling or covering £3 of your bet at 47
• Profit earned is 47-27 = 20 x £3 = £60
• The market continues to improve towards the close with the Dow Jones closing up 14 points
• The Binary market therefore settles at 100 giving you a profit of your remaining bet of 100-27 = 73 x £2 = £146
• Total profit on the trade is £146 + £60 = £206

Standard Binary Bet - Losing Bet Example

• It's 9am the FTSE 100 index is up 27 points but you are bearish expecting prices to fall by the end of the day
• The Binary Bet for the FTSE closing DOWN at the close is quoted at 35-38
• You buy it (go long) risking £5 a point
• The market sells off around 15 points by lunchtime but then Wall Street opens firm and goes stronger
• This in turn causes London to rise and the FTSE ends up 40 points by the close of business
• The Binary bet therefore settles at zero translating to a loss of 38 x £5 = £190
• Note that the minimum stake on a Binary bet is £1 a point so much smaller sums can be risked and won

Range Binary Bets - Example

• A standard Binary bet has advantages and disadvantages. If you buy the Binary UP bet for a certain market and that market closes higher by just a single point then the Binary will settle at 100
• However you don't get paid anymore if the market in question settles 50 or 100 points higher
• Range Bets therefore bridge this gap
• You're very bullish on the FTSE 100 thinking it will close at least 50 points higher
• Instead of buying the simple FTSE UP Binary Bet you buy the FTSE +40 Range Binary
• The bet will settle at 100 only if the FTSE closes greater than 40 higher
• The range bet will thus be considerably cheaper to buy (perhaps by as much as 75%) than the standard UP bet because it needs in this case 40 points of strength versus a minimum of just 1 point
• Range Binary Bets therefore have similar characteristics to out-of-the-money options
• There is also another type of Range Bet and this is where one is speculating on a market closing within a certain range, perhaps the FTSE higher than 40 points but not higher than 50 points, a so called FTSE +40/+50 Range Bet
• If the market is 39 better by the end of the day the Binary bet will settle at zero, if anywhere from 40-50 better the Binary settles at 100 point but if greater than 50.1 the Binary will settle at zero
• This may seem very restrictive and it is, but a) the bet will normally be quoted at a very low level and b) by shorting the market you can always bet against the proposition

Binary Bets - Time Periods

• Whether a Binary Bet is on an hour's trading period, a day or a week the workings are exactly the same
• For the big volatile contracts like FTSE, DAX, Dow Jones and Nasdaq 100 there are a number of different time periods offered
• Hourly
• Noon
• 3pm for FTSE, DAX
• Daily, and
• Weekly

Example - Hourly Dow Jones Binary

• The time is 3.15pm in London
• The Dow Jones was trading at 10,360 at the start of the hour (3pm)
• You are short term bearish the market expecting it to fall between now and 4pm
• You therefore buy the Wall St Hourly Binary DOWN bet at 66 risking £2 a point
• You are wrong on the trade, Wall Street is trading at 10,370 at 3.59pm therefore the Binary bet settles at zero
• Your loss is 66 x £2 = (£132)
• Remember that the Binary market is always being quoted so you would have always had the option to close out all or part of the bet before 4pm, perhaps at a reduced loss

Individual Stocks

• There are Binary Bets quoted on the bigger FTSE 100 individual stocks
• Share price movement are somewhat less volatile and slower moving than stock indexes so they are quoted on a weekly basis
• The market for Vodafone closing up on a given week maybe trading on a Tuesday at 41-45
• If you expect prices to close up then buy the bet, if you are bearish and expect lower prices (on the week) then short the Binary Bet.
• One Touch and Range Binary Bets are also offered on individual stocks

Other Markets

• Binary markets are also quoted on the major currency cross rates such as E/$, $/Yen and £/£ etc
• Binary Bets are new so expect more markets to be quoted over time

Commissions, Margin & Rules

• No commissions on any Binary Bet, they're built into the spread charged
• No margin requirement either. Your maximum loss is known beforehand, if you don't have the funds in your account (or access to them via credit) the bet will not be allowed
• Make sure you fully understand the rules such as how the official settlement prices are determined before you trade.

The deposit requirement for all binary bets is an amount equal to your maximum loss on that bet. There are no running margins, as your bet is already on the table and paid for. You either win or lose, unless you get out before the settlement point, which is possible with bets from binarybet.com, spreadex.com or betonmarkets.co.uk. Betonmarkets.co.uk offers a greater variety of instruments and fully flexible intra-day as well as daily expiry times and is more user friendly than its competitors as of April 2004 but the industry is always changing and we're strive to keep you updated.

Betonmarkets.co.uk covers a range of main cross currencies and international indices, as well as a selection of 28 US stocks, which appear to be technology oriented, and 10 UK mainline stocks including Tesco, BP, Barclays and Vodafone.

BinaryBet.com covers a range of currencies, indices and UK stocks. Bets are predefined very sensibly and continuous two-way prices are made via a mini Java applet. For those who like sports, a wide range of binary bets are quoted on the outcome of various events. For example: Manchester United to win the first half, as quoted last Saturday at 65-71. SpreadEx covers a small number of indices, including the Dow and the FTSE. It will be adding more instruments soon.

Since a binary bet is not considered to be an investment (like spread betting), it is not covered by the normal UK Financial Services regulations. So, although IG Index itself is covered by the Financial Services Authority (FSA), binarybet.com is not and neither is betonmarkets.co.uk.

SpreadEx's service, however, is not officially a binary bet since there are three settlement opportunities. According to the company, then, its service can be considered a form of financial investment and comes under the FSA umbrella.

SpreadEx "binary style" bets can have three outcomes, rather than two (there can only be two outcomes in a true binary bet) - if a SpreadEx bet ends on the price, winnings are split 50/50.

Normal spread betting firms will specify a win as a certain price and above (or below, thus only allowing two outcomes. In other ways, the SpreadEx bet acts and behaves just like similar types of binary bet at binarybet.com.

Binary bets broaden yet further the already-impressive array of financial instruments available to private investors. More choice means more opportunity, but beware and take care - you are trading against a statistically-tested system of odds.

A rule of thumb some speculators use is to risk no more than one tenth of your risk capital on each trade. Risk more (unless you have a way of being extremely sure of the outcome), and you give up the security of knowing your losses are strictly controlled.

Not only that, but the desire to make back what you may have lost on previous trading often leads to a position that is out of proportion to your capital base.

Greed is generally the reason for this, and it is easy to get carried away imagining how big the profits will be and what prestige and happiness they will bring if the bet comes off.

Remember, if you are irrational enough to take on more than you know to be the correct amount of risk on a trade, then there is a good chance that your reasons for taking the trade are illogical. The lesson here is to be methodical and calm. Markets constantly present new opportunities. Live to fight that day, and don't bet too much of your capital on one position.

Brought to you in association with Alex from www.learnmoney.co.uk