Binary Options Explained

What is Binary Options Betting?

Binary Betting Explained

A binary option is an exciting variant of traditional spread betting that requires the bettor to predict market positions for a particular point in time. A binary bet has only two possible outcomes, you are either ‘in the money’ or ‘out of the money’ depending on your prediction.

In binary betting, you do not have control over what time and price that is specified for a given financial market. Instead, you are asked the question ‘will market X be above or below price Y at time Z today’.

Let’s look at an example for a binary option known as an UP (where the question involves predicting a price increase):

Binary question: will the FTSE 100 be above 5451.68 at 2:30pm today?

Your options are then to either agree (buy) or disagree (sell). The buy and sell prices will be anywhere between zero and 100 with a spread of 3 to 6 points.

Let’s say the buy price is 88.49 and the sell price is 85.54.

In this example, if the FTSE 100 was at 5462.08 at 2:15pm, the buy price would be very close to 100 as the odds of the market finishing above 5451.68 are very high. This means that you may buy at 95.84 and your winning option would then come in at 100 meaning a gain of just 4.16. However, in the unlikely event that a shock dips the market under 5451.68 with 5 minutes to go – you stand to lose everything as the option finishes at zero.

Types of Binary Bet

Ladder

The example above is a ladder. It is the simplest form of binary betting and is a prediction on whether the market will finish above or below the stated level at a given time. If the market finishes above the stated level then the option will pay 100; conversely, if the market finishes below the stated level then the option will pay zero. Your gain or loss depends on whether you bought or sold the market.

Tunnel

In binary betting, a tunnel is an option that predicts that the market will stay within a given barrier range. If the market dips or rises outside of this range before the expiry time then the option is settled at zero; alternatively if the price stays within this range then the option settles at 100.

OneTouch

Similar to the tunnel bet except the OneTouch bet has only one barrier price. If the market price touches or goes through this barrier price then the option settles at 100; the option will settle at zero if the option does not touch the barrier.

Hi/Lo

The hi/lo bet states a distance from the previous closing level that the day’s high or low must fall within.

Target

In binary betting, placing a bet on a target states that you believe the price of a particular market will fall within or outside of a given range. The range can be small or large, however the buy and sell prices will reflect the riskiness of the bet.

Regulation

Binary options are not regulated by the Financial Services Authority (FSA), please gamble responsibly.