Binary Trading: Quick Guide

View from the trading floor.

Greg Grogan works on IG’s trading floor in London. Find out about CFDs here:http://www.ig.com/uk/cfd-trading

Being a combination of traditionally defined spread betting and ‘win or lose’ bets, binary bets draw benefits from both. They present the opportunity to speculate on an opinion, without being tied to your initial view for a pre-defined amount of time. Indeed if the strength of your view changes, or if it switches entirely, depending on the time left to expiry of the bet you are afforded the chance to trade out of or amend the size of your position accordingly.

The concept of a binary bet has, at its core, a statement – one which will prove either true or false. The value of the market is determined primarily by the chance of the statement being either true or false at expiry. While live, the price of a binary bet can range between 0 and 100, but, as its Latin root suggests, at expiry, it will settle at either of these two extremes; if the statement is true the binary will settle at 100 and if it’s false, the binary will settle at 0.

Take for example a recent binary bet available through IG on January 30, 2014: ‘Wall St to finish UP (>15738.79)’, to expire at the official settlement of the Dow Jones industrial Average. Just before the US opening bell the two-way binary price was 87.9/89.9.

If you thought the statement would end up being true you could have bought, say, £10 per point at 89.9. In the event you were correct, the binary would have closed at 100 – 10.1 points in your favour. Multiplying the number of points won by your stake size gives a calculated payout of £101.

If you were incorrect then you would lose £879.

Therefore, if you thought the statement was false – selling £10 per point at 87.9, and it turned out to be so, the market would have settled at 0 then you realise a profit of £879. If you were incorrect you would make a loss of £101.

However, you do not have to wait on this binary result with your hands tied. While the market is open the value fluctuates within the 100 point range, dependent on the implied probability of the statement’s veracity.

If you had changed your mind about your original position after the market had moved against you, the options are there to get out of the trade, amend the size of your position or open a binary in the opposite direction thus limiting your potential loss.

In summary, binary bets provide the opportunity to speculate on a view you hold. Unlike vanilla spread betting, you know from the outset your maximum potential loss or gain, and unlike fixed odds betting you are able to close out of a position before expiry if your view has changed.

Spread bets and CFDs are leveraged products. Spread betting and CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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