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Binary Betting

Binary BettingBinary betting is a relatively new type of financial betting, that is, betting on the further course (increase or decrease) of the rate of a financial instrument (stock index, exchange rate, interest rate, etc.). Binary bets are quoted similarly to spread bets, which define the buy price, the sell price, and the broker's commission. The outcome is then settled as either a win (100) or a loss (0).

What Is Binary Betting?

It is a type of financial betting where the probability of a certain event occurring is rated on a scale of 0 to 100. If the event occurs, the bet settles at 100; if it does not happen, it settles at 0. It is possible to execute binary bets by using stocks, currency pairs, commodities, etc. as underlying entities.

A broker sets the price of a bet based on their perceived probability of the event happening. The higher the likelihood, the higher the price. For example, a price of 81-83 suggests that the broker believes the event has an 82% probability of happening.

A trader can profit from the bet in two ways: buying it if they think that the event will occur, and selling it if they think it will not happen.

There are the following types of binary bets:

  • Call – if the trader believes that the value of a specific security is about to rise for some period of time.

  • Put – if the trader believes that an asset will decline in value before expiration.

Traders also can close their bets early before the expiration date if they consider such action beneficial. For instance, they can lock in profits or cut losses if the price is moving against their position.

Advantages of Binary Betting

One of the main benefits of binary bets is that the trader will know exactly the maximum amount that they will win or lose at expiration even before the activation of their contract.

Additionally, this type of betting minimizes risk exposure. The binary better will always know the precise amount you will lose at the outset of each trade.

Finally, binary betting is relatively simple. It is not concerned with the volumes of movement in a market – it is simply a bet on whether the market will move up or down. This makes it easier for the trader to predict the results, and in essence, there can be only two possible outcomes – either win or loss.

How Binary Betting Works

Binary bets are quite simple to understand and operate because they have just two outcomes.

For instance, let's suppose that you consider the Dow Jones Industrial Average to finish higher by the end of the day so you will use the Dow as the underlying asset of your binary bet for the day.

One of the outcomes will be as follows:

  • The Dow drops by the end of the day and your trade settles at 0.

  • The Dow rises by the end of the day and your bet settles at 100.

As a result, you will either win or lose everything, without any intermediate results.

One of the key differences between fixed odds and binary bets is that with a fixed odds bet, you have to wait until expiration for it to close. In the case of a binary bet, you can exit your trades early if you consider this action beneficial, so you can take profits or cut losses before your trade expires.

The price of a binary will constantly fluctuate, especially when expiration is approaching because it tracks both the probability of the eventual outcome and market sentiment. As your broker will constantly keep you up to date, you can open a long or short binary bet at any price that you consider most profitable.

Binary Betting Example

A broker quote spreads for binary bets on oil prices at 75-78. The trader can buy at 78, and if the market rises, their profit portion is stake x (100-78). If the market falls, their loss is stake x 78.

It means that a cap on potential profits and losses can be taken from a transaction. Unlike spread betting, where the extent of market swings represents greater wins or losses, it is only the direction of movement.

Regardless of the market where the binary bets are offered, they work basically the same. The bets are settled at either 100 or 0 and are quoted on spreads within that range, allowing the trader to profit from predicted market movements.

Summing Up

Binary betting is a type of financial betting that supposes only two outcomes – win (100) or loss (0), without any intermediate results. It is quite a simple and risk-free type of betting. There are two types of binary bets: call (the value of a specific security is about to rise for some period of time), and put (an asset will decline in value before expiration).