How to create synthetic binary/digital bets?

[lhiggins]

Since the demise (today) of BetsForTraders.com, I wondered if anyone knows how to create a synthetic binary/digital bet using options or something that may approximate to it. I trade weekly up bets.

BetsForTraders.com suggests opening an account with BetOnMarkets.com. They would, of course, as they are going into the same ownership where the new owner is no longer running BetsForTraders.com.

However, the prices on BetOnMarkets are much worse from what I can see eg. a weekly FTSE Up bet from spot costs around 60 on BoM whereas it was 55-ish on BfT. That makes a *BIG* difference to my models to the extent where I cannot trade them any more.

The option combinations I've looked at so far don't seem too economic either so hoping someone may have ideas. The lack of value could be an indication of why BfT sold out or why BoM wanted to eliminate the competition.

 

[ukdaytrader]

You will need to recheck this but if you buy a put and buy the index at the same point your effective premium = cost of put. Profit = total upside less cost of put. Downside = cost of put only. You could also sell a further out of the money call to reduce your premium on the option to make it cheaper but obviously lose some upside.

 

[tripleogstar]

Since the demise (today) of BetsForTraders.com, I wondered if anyone knows how to create a synthetic binary/digital bet using options or something that may approximate to it. I trade weekly up bets.

BetsForTraders.com suggests opening an account with BetOnMarkets.com. They would, of course, as they are going into the same ownership where the new owner is no longer running BetsForTraders.com.

However, the prices on BetOnMarkets are much worse from what I can see eg. a weekly FTSE Up bet from spot costs around 60 on BoM whereas it was 55-ish on BfT. That makes a *BIG* difference to my models to the extent where I cannot trade them any more.

The option combinations I've looked at so far don't seem too economic either so hoping someone may have ideas. The lack of value could be an indication of why BfT sold out or why BoM wanted to eliminate the competition.

Why don't you jus spread bet or buy weekly call/puts on whatever market you are trading. The company providing the service probably price their odds off the options trading in the market anyway, so cut out the middle man, and get direct exposure to the market.

 

[lhiggins]

You will need to recheck this but if you buy a put and buy the index at the same point your effective premium = cost of put. Profit = total upside less cost of put. Downside = cost of put only. You could also sell a further out of the money call to reduce your premium on the option to make it cheaper but obviously lose some upside.

Thanks, that's given me a starting point to investigate various combinations. Buying options always means I need to get the time value back on the upside (unlike a digital). When I backtest, though, this may still prove profitable. I'm poised to try backtesting when I get get theoretical options pricing working in Excel. Do you know what volatility figure is typically used?

As a variant of what you suggest, I'm also looking at writing calls and being long the market. The downside risk is completely different, of course, which I would like to cap. I'll look at the effect of stops or greater OTM puts to mitigate this.

Thanks for your advice.

 

[lhiggins]

Why don't you jus spread bet or buy weekly call/puts on whatever market you are trading. The company providing the service probably price their odds off the options trading in the market anyway, so cut out the middle man, and get direct exposure to the market.

I agree that being direct in the market would be preferable not least because there are more players and greater liquidity. As there are no 'natural' digital products though, the question is how best to do that with options (seeming the most likely suitable product).

Spreadbetting alone carries a completely different risk profile and, backtesting on my models, a very different equity profile that's far less consistent.

BetsForTraders do/did hedge in the market but also have their client positions net off too. Without knowing in detail what counter trading they undertook, I think that you partly benefited as a punter from the netting which is why I'm finding it more difficult now to synthesise their bet.

 

[lhiggins]

Why don't you jus spread bet or buy weekly call/puts on whatever market you are trading. The company providing the service probably price their odds off the options trading in the market anyway, so cut out the middle man, and get direct exposure to the market.

I've just realised you mention weekly options which I've not seen anywhere - where can you trade these?

 

[Martinghoul]

A European binary can be approximated as a vanishingly tight call/put spread. An American binary is a lot tougher, but can be replicated using a European binary and some vanilla options (if memory serves, but you should consult Haug's book for a guide).

 

[lhiggins]

A European binary can be approximated as a vanishingly tight call/put spread. An American binary is a lot tougher, but can be replicated using a European binary and some vanilla options (if memory serves, but you should consult Haug's book for a guide).

Hmmm.. I just looked at some prices for betting on the upside. For the FTSE future and looking at calls -4400 and +4350 (when spot's about 4392), it gives a a binary equivalent of paying 60 to win 100. BetsForTraders used to price at between 54-58. However, the option strategy also pays out partly for some downside. This seems to have a lot of promise and another backtesting task for me.

One remaining problem, though, is that with binary betting I can adjust the expiry date willy-nilly whereas tradeable option series' are pre-defined. Any thoughts on this?

Thanks for your helpful reply.

 

[lhiggins]

A European binary can be approximated as a vanishingly tight call/put spread. An American binary is a lot tougher, but can be replicated using a European binary and some vanilla options (if memory serves, but you should consult Haug's book for a guide).

Sorry I forgot to mention, I'm only looking at Europeans. Apart from anything else, it's easier to backtest with a simple exit!