Fixed odds trading

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Definition:
A method of trading whereby the maximum loss is restricted to one's initial stake and the payoff is defined by preset odds.


Hardly a day seems to pass without the launch of a new product for financial speculation, so it is no surprise that a traditional betting product, namely fixed odds trading, has made a recent appearance. As the name implies, fixed odds trading works under the same principles as conventional betting. Maximum loss is limited to one's initial stake and the payoff is defined by fixed odds.

However, traders enjoys more flexibility than is usually available from traditional bookmakers as they are able to choose from a number of variables to customise their bet.

These includes:

  • a market or instrument
  • the behaviour of the above
  • an expiry date or time limit
  • how much they would like to win if their view proves correct.

For instance, a trader might wish to win £1000 if the FTSE-100 is higher than 5000 at the end of August 2005. The fixed odds company will use a sophisticated algorithm to quote odds for that particular scenario and then calculate the stake level that would result in a win of exactly £1000 given those odds.

Obviously the less likely the chosen outcome, the better the odds offered. If the outcome is almost certain (e.g the FTSE-100 will be between 1000 and 6000 during the next two weeks) then the bookmaker will not quote any odds and you will not be able to bet.

Specialised fixed odds bets called binary bets or binaries are also offered by some spread betting firms.

Contents

[edit] Examples of bet scenarios

The below represent the most common types of bet offered by fixed odds bookmakers.

[edit] Bull bet

You would buy a bull bet if you believe the instrument will be higher than a certain level on the expiry date.

[edit] Bear bet

You would buy a bear bet if you believe the instrument will be lower than a certain level on the expiry date.

[edit] One touch bet

You would buy a one touch bet if you believe the market will touch a given price at least once before the bet expires. In other words, a one-touch pays out, if at any time prior to expiration, the market touches or trades through the specified price.

[edit] No touch bet

A no touch bet is the opposite of the one-touch bet. You would buy a no-touch bet if you think the market will never reach a certain price level within a specified time.

[edit] Expiry range bet

You believe that the market will be between two predefined levels (high and low) on the expiry date.

[edit] Barrier range bet

You believe that the market will never touch two predefined levels (high and low) before or on the date the bet expires.

[edit] Double touch bet

You believe that the market will touch two predefined levels (high and low) before or on the date the bet expires.

[edit] Up or down bet

You win if the market touches either of two predefined levels before or on the date the bet expires.

[edit] Double up bet

A double up bet pays two times the stake if the market rises above a given level between the time of purchase and the close of trading. It expires at the close of business on the day of purchase of the bet.

[edit] Double down bet

A double down bet pays two times the stake if the market drops below a given level between the time of purchase and the close of trading. It expires at the close of business on the day of purchase of the bet.

[edit] Trading strategies

[edit] Related T2W resources