Spread Betting or Binaries?
While distinct from spread betting in a strict sense, most brokers also offer binary betting options for traders, which provide an interesting twist on the spread betting model. While binaries can be fairly limited and are arguably even more simplistic than spread betting in concept, there are occasions where spread betting on markets with particularly small anticipated movements can be applied to best effect through a binary bet, in order to maximise earnings from otherwise less profitable opportunities.
In spread betting, you buy or sell a market at a defined price and take a profit on the difference between the entry price (i.e. the point at which you opened your buy or sell position) and the exit price, expressed as percentage points and multiplied by your original stake to calculate winnings. Thus, the more a market moves in your favour, the more you win – earnings are variable depending on how ‘right’ you are. In binary betting, the concept is broadly the same, but with one crucial distinction.
With binaries, the market is either up or its down – the trader is either right or wrong. Whether that’s by one point or one hundred points is an irrelevance – the transaction is still settled in the same way, and pays out the same amount regardless of whether the position just scraped over the line or was a runaway success. Spreads are quoted within the range of 0 to 100, and the profit and loss component is calculated on the difference between the entry price and either 0 or 100, depending on whether the trader made the right call.
How Binaries Compare
Binaries and spread betting are fundamentally very similar in the makeup, although the main important distinction between the two delineates very clearly
Envisage the situation – you know the FTSE100 is likely to rise on the day. Two of your preferred UK companies which your research has shown are performing well are preparing to release earnings results, alongside an anticipated rise in consumer spending which you think will help buoy retail shares and ultimately the FTSE as a whole. Looking to the binary markets, you see a spread of 68-70, and decide to buy at 70 at a stake of £1. (Note that so far, the transaction is identical to a spread betting transaction, with the exception of a slight variation in the presentation of the spread).
As the day progresses, your two companies publish surprisingly flat results, and the consumer spending data isn’t as healthy as you had previously anticipated, but still sufficient to give an indication that the situation might improve for retailers in the near future. The market closes up by a fraction of a point. In a spread betting transaction, you would be lucky if this scenario returned the whole £1 in profit. With a binary transaction, however, this position would be settled as a win, and return £30. That’s because the position is made up to 100, which is considered the market closing point. So, 100-70 (the buy price) = 30 multiples of the stake, which was £1 a point. Had the position lost, by either one point or 10, the market would be made down to 0, thus the loss would have been 70 points times £1 per stake – £70.
In short, binaries have much of the same benefits as spread betting, but can have a slightly different outcome in some marginal cases.
When To Use Binaries?
Binaries come in handy in situations where market movements are expected to be slight, and at any rate where markets are expected to move in shallower ranges than with spread betting. As a general principle, binaries should be used in markets that are unlikely to close far from their entry price. This enables the trader to profit from a wider range of points than would be the case with a spread betting transaction, so it’s a purely circumstantial, economic decision as to which best fits the trading scenario at hand.
Binaries can also be used when you expect a shock result from a market that was predicted to move heavily in one direction. Say the FTSE100 was projected to do especially well, but you had reason to believe this optimism was unfounded – while many traders will have hoped for a large rise in the market, you might be hoping for a small fall, in which case a binary position will help you make the most of your money.
Financial spread betting can in practice be applied to a number of different markets, indices, assets and trading styles. It provides traders with unparalleled flexibility, and the ability to leverage returns in a cost-effective, streamlined way, making it the ideal addition the trading toolkit.
Now that we’ve examined spread betting in practice and how it relates to different trading circumstances, its time to take our final steps into trading theory and look at how markets function, and the tools and orders at your disposal for capitalising from market movements.