A binary bet enables you to bet on whether or not a particular event will occur in the future. For example, the event “FTSE 100 to close up or down at 16:30” has only two possible outcomes: 'yes' or 'no'. If you bet that the FTSE 100 will close up at 16:30 and it does, you win. If the index closes down, you lose. It’s as simple as that.
How to bet on the FTSE 100
Like any other financial instrument a binary bet has a spread, for example 44-47 means you buy at 47 or you sell at 44. The only difference being that the price is always between 0 and 100. This is based on various factors, mainly the time to expiry and underlying market price. Also a binary bet expires at a given time and the price at expiry is always 0 or 100. If the event at expiry is realized the price settles at 100. If the event is not realized the price is zero. This means potential losses are limited as the maximum you can lose is (zero – price paid).
Example:
The binary price for the bet “FTSE 100 to finish up at 16:30” is 39-42. This means you buy at 42 or you sell at 39.
If you believe the FTSE 100 will close up on the day, you buy at 42.
If you don’t think the FTSE 100 will close up you can do the opposite by selling the bet. In this case you sell at 39.
The closer you get to expiry, which in this example occurs at 16:30, the closer the price will move to either 0 or 100.
If you bet that the FTSE will close up there are two scenarios upon expiry:
1. The FTSE closes up,in which case the bet settles at 100 and you win 58 points (100 – 42)
2. The FTSE closes down, in which case the bet settles at 0 and you lose 42 points (0 – 42)
To calculate your profit or loss, take the number of points won or lost and multiply this by your bet size in £’s. For example, had you bet £10 per point and won then the profit would be £580 (58 x £10). Had you lost the bet (FTSE closes down) your loss would be £420 (42 x £10).
One advantage of binary bets is that they are tradable. If you buy the bet “FTSE to close up” and during the day you change your mind because you think the FTSE will close down, you can always sell the bet to cover your position.
In the UK there are not many companies offering binary bets. One company that offers binary bets is IG Index.
Note that binary bets are not subject to regulation by the Financial Services Authority, companies offering binary bets are regulated by the Gambling Commission.
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