Binary betting is a modern method of speculation that arose as an offshoot of spread betting and soon became popular with traders. It is an unusual and interesting hybrid between fixed odds and spread betting.
Why is a binary bet a hybrid?
Fixed odds because it involves betting on the percentage chance that a specified event will occur. If the event does occur the bet is settled at 100; if the event does not occur the bet is settled at 0. In other words, there are only two possible outcomes and the maximum gain or loss is known in advance.
However a binary bet contains elements of spread betting too, in that (until expiry) it is quoted by the bookmaker as a continuous, fluctuating two-way price (bid and offer) and a trader can buy or sell at any point. This includes open positions which can be closed before expiry at values other than 0 and 100, allowing a trader to lock in profit or cut a loss.
Binary bet prices are not based upon the underlying price of the instrument, but upon the odds of an event occurring, hence the quote range of 0 to 100. The greater the chance of the event occurring then the higher the quote will be and vice versa. A time element will obviously be included in the quote, so that if the event becomes so likely as to be almost certain (e.g. if the FTSE is 50 points up at 16:28 then the quote for it to close up might be 96-99 or 97-100 as the outcome is so likely as to be almost a certainty). This is similar to the time value of options.
In order to place a bet a trader simply buys or sells at the current quoted offer or bid price repectively.
Imagine a bid/offer price is quoted on the "S&P 500 Index to finish higher on the day" at say 81-85 (i.e. the bookmaker thinks the odds of this happening are quite high).
A trader who agrees with this view (perhaps it is late in the day and the S&P is up by a healthy percentage, so the chance of it ending down is small) could buy a certain number of pounds per point at 85. Let's say he buys Â£100 per point.
Bet: Index will close up. 85 x Â£100 per point.
Index closes up. Bet expires at 100. Profit is 15 x 100 = Â£1500
Example trading strategies
Fade sudden moves
The trading strategy is simple in its application. It looks for sudden sharp moves (high/lower) on the back of news (in almost any market) and then bets that the move will reverse.
For example, some fantastic economic news is announced which bids the FTSE 100 sharply higher. The quote that it will close higher bounds up to, say, 90-94, at which point we would bet that the move will not last and the market will head back down. The risk to reward ratio is good since we would risk 10 to potentially make 90 (multiplied by our stake).
Stock indices fit the bill perfectly because they have a habit of over-reacting, getting a lot of punters say buying only for this buying to dry up. Then selling pressure creates more pressure (after all if everyone has bought who is left to buy) and before long itâ€™s a rout to get out. This is what the betting strategy tries to take advantage off, and the bonus is that the risk is often small with the payout large.
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