Binary Betting: Another Way of Spread Betting?

BinaryOptionsNow | Published on January 3, 2011 at 6:13 am

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Binary betting is a way of speculating on the financial markets. It was developed by spread betting providers such as City Index as a simple, transparent alternative to financial spread betting. In sharp contrast to spread betting, the risks of binary betting are limited to the point that traders know exactly how much they stand to gain and lose when they open the binary bet. As is also the case with spread betting, any binary betting profits made by traders are tax-free*.

How binary betting works:

By definition, a binary bet is a bet on an event (in this case, the performance of a financial market) that has only two possible outcomes (in this case, closing at a price higher or lower than that of the previous day). As with spread betting, a correct prediction will result in profit for the trader, whilst an incorrect prediction will result in a loss.

The difference between the two, however, is that binary betting prices are not based upon the underlying price of the market in question, but instead upon the odds of the market closing at a higher or lower price than the day before. This means that the buy/sell price is always quoted between 0 and 100.

If at the end of trading the market price exceeds that of the previous day (whether by 1 point or 50), the binary bet will settle at 100. If the closing price at expiry is lower than the previous day, the binary bet will settle at 0. Therefore, the closer the market price to 100 when the binary bet is opened, the shorter the ‘odds’ that the market will close at a higher price than the day before.

Binary betting example:

Imagine that the time is 11am and the UK 100 has already gained 35 points on yesterday’s close. The UK 100 Up Binary bet price currently stands at 70.2 / 73.4.

From here, if you expected the UK 100 to close at a higher price than yesterday’s closing price, you might open a ‘buy’ position of £10 per point at 73.4. Unlike financial spread betting and CFD trading, binary betting limits your profit and loss potential, so you would already know that in the worst case scenario you would lose £734 (0 – 73.4 x £10). You would also know that your maximum profit would be £266 (100 – 73.4 x £10).

Let us then assume that the next few hours see the UK 100 stay fairly static and remain ‘up’ by 35 points. The UK 100 Up Binary bet price now stands at 90.0 / 93.8. Having reached this level of profit, you might decide to cash in your gains by selling £10 per point at 90.0 (a 16.6-point movement from 73.4 in your favor). Alternatively, you might hold out until the close of trading to see if the bet settles at 100 (a 26/6 movement on your original position).

Binary betting vs. Spread betting

The key difference between spread betting and binary betting is that with binary betting your maximum profit and loss are always known beforehand. This is because the binary market cannot rise above 100 or fall below 0 – unlike spread betting, in which there is no limit on your profit and loss potential beyond the deposit you provide.

Please note that Binary Betting activity is not regulated by the Financial Services Authority. The normal protections afforded by the regulatory framework do not therefore apply. In respect of Fixed Odds Bets and Binary Bets, City Index Limited is licensed and regulated by the Gambling Commission.

Spread betting is a leveraged product which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

*Spread betting and CFD trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.

Content provided by: MarketWire

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