Delivering much of the same benefits to traders as spread bets, including significant leverage, binary betting is becoming an increasingly more widespread and profitable trading vehicle. Binary betting is similar to spread betting in a number of key areas, yet its main distinction is held within the name. A spread bet can close one point up or down, or it can close points up or down — a binary bet is much more black and white.
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Binary bets provide fixed odds for investors, with fixed earnings and loss limits. If a binary bet is successful, it is settled up at , with the difference between the and the buy price giving the multiple of return for the stake. If a binary bet loses, it is settled at 0.
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One of the key advantages of binary betting as a trading style is the ability to calculate your potential earnings and losses from a given transaction. Binary bets are quotes on spreads, similar to spread betting, between 0 and The closer these spreads are to , the more likely an event is to occur — for example, if the FTSE is quoted at , it is thought very likely that the market will rise that day, with a maximum upside of just 6 times your stake. However, odds of make an event unlikely in the eyes of the broker quoting the spreads, leaving a large scope for earnings on the upside.
Calculating earnings and losses in binary betting is an easy process. Thus, the formula for calculating earnings with binary bets can be broken down as follows:. Of course, these formulae are reversed for short positions, i. Nonetheless, the calculus of profit and loss with binary betting is arguably one of the most straightforward in investing, thanks to its fixed odds nature.
Binary Betting - How Binaries Work
Binary betting can at first seem like an alien concept, particularly for traders unfamiliar with spread betting and the concept of fixed odds. In actuality, it serves as an easier trading style than many others, insofar as understanding the ins and outs of the system are concerned. While the individual markets for binary bets vary depending on the broker you chose, the basic underlying principles remain the same.
Binary bets are quoted similarly to spread betting, which defines both the buy price, the sell price and the commission component taken by the broker.
Calculating Profits and Losses
Therefore your winnings - or losses in this case - are:. A Floating Binary is the most common type of binary bet. It is a bet where the binary price moves but the strike price the price the market needs to reach for the event to occur and therefore make up at either or 0 is fixed.
For example, if the bet is "Brent Oil will end down on the day" the Buy and Sell prices will change throughout the course of the bet, but the proposition itself will remain the same. A Fixed Binary is a bet where the binary price remains fixed but the strike price the price the market needs to reach for the event to occur and therefore make up at is moving. Floating and Fixed Binary bets are fundamentally distinct. With Floating Binaries the buy and sell prices float whilst the target price remains static.
With Fixed Binaries the buy and sell prices remain fixed whilst the target price moves. A Floating Binary bet - and only a Floating Binary bet - can be closed out before the end of the lifetime of the bet.
CFD Trading vs Spread Betting
This allows you to take an early profit or cut your losses if the bet is going against you. If you bought you can sell the same amount to close, or if you sold you can buy the same amount to close. However, this also works the other way.
You can make more money by spread betting than by trading, even if you only start off with a small amount of money. With trading, you can only lose how much you invest. If this was to happen in spread betting, you would be in several thousands of pounds of debt.
Binary Options Trading: Betting or Investing?
In many countries, such as the United Kingdom, you do not have to pay any tax on your earnings from spread betting. To be eligible for this tax break, you must have another job spread betting must not be your only source of income.
This is a key benefit, as you have to pay income tax on your trading earnings. In summary, Spread Betting certainly sounds like an excellent way to make money.
Choosing your Asset
However, before you invest your hard earned cash into it, I suggest that you first open a demo account to get started. This allows you to familiarise yourself with the platform and try out different strategies. Some brokers allows you to open a demo spread betting account and their platform is user friendly and rather easy to use.