Binary pricing

Robertral

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Ok, doing basic stoch calc gives me a simple binary price of exp(-rT)*N(d1)
Now I've been looking at IGindex's hourly binary bets. I haven't got an account with them so I'm not sure exactly how they work in practice. When I'm putting in my parameters what to I put in for time? I mean let's say the option starts its life at 10:00 and expiries at 11:00. Has anyone looked into this? I know I have to rescale the vol. Has anyone got any pricing tricks for this?
 
Sometimes the price doesnt exactly relate to the underlying market. Other day I brought an hourly for 22 points, it was down 10. It then proceeded to go up until it was up 2. The price I could sell at was 20. It then dropped again and expired down.

Because of the spread I didnt ever get a chance to sell for a profit.

I wonder how much the price is affected by how much is brought. I would guess quite a lot.
 
Of course it wont.

The MM will adjust the price in his favour depending how much he has sold etc

My question was relating to the pricing of hourly bets. Is there a tweak to the time component somewhere?
 
I guess on the basis that the MM can't hedge his position effectively in the underlying market will mean that customer activity will have an effect on the pricing structure. If FTSE was +15 at 1.30pm and loads of money started to bet, via a binary, that FTSE was going to finish down then the MM would be prudent to lower is "FTSE to finish down" bid and offer in order to encourage people to bet that FTSE was going to finish up.
Any market which the market maker cant hedge will act this way, thats why they are so actively promoting "Binary Bets", the more people who do them the more liquid they become and therefore there is less of a chance of their book becoming heavy net in one particualr direction.

Steve.
 
stevespray said:
I guess on the basis that the MM can't hedge his position effectively in the underlying market will mean that customer activity will have an effect on the pricing structure. If FTSE was +15 at 1.30pm and loads of money started to bet, via a binary, that FTSE was going to finish down then the MM would be prudent to lower is "FTSE to finish down" bid and offer in order to encourage people to bet that FTSE was going to finish up.
Any market which the market maker cant hedge will act this way, thats why they are so actively promoting "Binary Bets", the more people who do them the more liquid they become and therefore there is less of a chance of their book becoming heavy net in one particualr direction.

Steve.

Thanks :)
 
They run a matched book at IG for the binaries so it is 100% supply and demand with a (fat) spread.

Price is determined by an algorithm that auto adjusts it as a function of the orders in the system.

I heard that they started out by trying to use a Monte Carlo with an interpolated over night vol input, but it didn't work so well as the returns had such a wide standard deviation due to the problem of hedging with vanillas / spot.

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(Note: My source for the above is a friend of my brother in law's who works there so I could not swear by any of it!).
 
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