IG Index Tunnel Binaries - can anyone explain how they work?

I'm becoming increasingly curious about the 'tunnel binaries' offered by IG Index. The section explaining them on the IG Index web site is very vague, simply saying that if the price fails to breach one of two pre-determined levels (one above and one below the previous day's close) the bet will settle at 100, but if the price does breach one of these levels the bet will settle at 0. What I don't understand is exactly what happens when you enter a tunnel bet. What does your P/L shows as when you've entered? What happens to your P/L if the price moves closer to one of the price limits? Can anyone explain exactly what happens from the beginning to the end of a tunnel bet and how the P/L changes with time and price movements?

The easiest way to see how they work is to open an account with IG, binarybet.com (which is owned by IG) allows you to open an account in about 15 minutes online. As the majority of IG 'clients' never place even a single bet after opening an account you dont need to feel obliged either.

Tunnels are fairly easy to understand.
The quoted prices will range between 0 and 100 depending on how far the underlying is from either end of the tunnel range.

If you are interested in a +/-30 tunnel and underlying price change is +25, then the quote might be something line 10/15. If the underlying falls back to unchanged, the quoted price might drift to 47/53. As it nears the end of the day and price is still unchanged the quote will drift towards someting like 85/95 and eventually 100.

Typically the quote depends on how far the price is from either extreme point of the tunnel and also how much time there is until expiry.

As far as your P/L goes, as the spreads on Tunnels can be quite large, you will show an imediate loss of about 5 * your bet size. Sometimes the spread will be wider than 5 and sometimes a bit less than 5.

Hi Mitch,

you can simply decompose the tunnel into a digital put at the upper barrier plus a digital call at the lower one. For P/L just run the value of each and then sum up the two.

Bert

One can NOT decompose a tunnel into a digital call and a digital put!!!!! That is madness
For two reaasons. One, the digital calls and puts are not path dependent (i.e they expire only at the expiry time). Tunnels are path dependent (i.e if the underlyign touches the barrier level it expires). Therefore on that basis you can't decompose into two digitals.
Two, well I'm not going to even bother with this as the first one explaisn it all.

Read up on your basic options before posting.

<dredges off the memory banks>
Something like knock-outs or maybe barriers rather than digital?
<looks for a copy of hull lying around, can only see the 3rd Edition (1997), goes off to find a tame quant>

One should avoid hedging a discontinous exposure with a continous one.

But more dangerous the other way round (ie hedging continuous with discontinuous) top of my head?

Edited to add : Quant back from liquid lunch postulates something like a digital box + a normal box? (box = long ITM call, long ITM put, short OTM call, short OTM put) . . . but without reading the small print . . . mind you, it's got them doing something this pm!

No, more dangerous to hedge discontinous with continous.

Edit: I can't see why one would want to hedge continous with discontious anyway. If you wanted the digital vega profile you'd use a risk-reversal or a call spread