Types of Binary Bets Explained

Binary bets come in a range of different shapes and sizes, all with the common requirement that traders pick a side: yes or no, win or lose. The most basic form of binary bet is know as the ‘up’ bet, and is very closely aligned to the corresponding ‘down’ bet, on which the majority of binary bets will be traded. As a straightforward trading proposition up/down bets seem simple on the face of things, and for the trader with a sharp eye and ability to read market movements, it can be all that’s needed to capitalize on market movements through binary betting.

An up bet carries with it a simple proposition – that the market will close up on its present rate by the end of the day’s trading. Traders take an up bet when they think that the market will rise, factoring in the actual odds of the market rising against the odds offered by the broker.

Because the binary betting broker fixes the odds relative to the current price of the market, the odds will constantly fluctuate throughout the day, so it’s better to wait for a depression in market rates to take your position, assuming you still forecast it to grow over the course of the trading day. In some cases, it is possible to close out your position before it is settled at the end of the day, thus locking in a profit smaller than that which would otherwise be available but guaranteed at some point before the end of the day.

Similarly, a ‘down’ bet focuses on the proposition that the relevant market or asset will move down on the day from the point at which you open your position. Effectively shorting the market, a down bet relies on the market falling from the point at which you entered, and in doing so will settle at 0 – even if the market falls by only a fraction of a point.

Up and down bets with binaries form the bulk of the everyday trade in binaries through the various online brokers. While they represent the most straightforward form of binaries, that’s not to say they are any easier to implement, and for the trader that manages to leverage up and down bets to his advantage, the rewards can be substantial.

While Up/Down bets form the staple of binary betting, there are also unsurprisingly a range of other outcomes that can form the basis of any binary trade. One of the second most common of these, and arguably a slightly more profitable form of binary betting is the handicap bet, so-called because the market must move in a certain degree in order to deliver the return – i.e. any positive market movement is actually ‘handicapped’ by the interplay of a further stipulation.

This can be a particularly effective way to capitalise on market movements when you believe the markets to move heavily in one or other direction, and represents a sort of halfway house between spread betting and binaries. Whereas normal binary bets make no provision for the degree of movement in the underlying market or index, handicap bets require the market to breach a certain threshold, beyond which the depth of movement is insignificant.

Take the following example as an illustration. Strong economic reports from the UK coupled with days of strong trading in the US and anticipated positive trading announcements from the UK banking sector look set to almost guarantee a rise in the FTSE. The binary spreads on an ‘up’ bet offered on the FTSE might be set to 90-95 in reflection of this, which leaves very little scope for profit if the market does indeed rise. In this instance, assuming a £10 stake, the maximum profit that could be taken is £50, while the maximum loss that could be realized is £900.

As you can see, the odds in this example are skewed to represent the enhanced likelihood of the markets moving upwards – in this case, set at 95% by the broker, factoring in his commission portion.

However, assuming you are confident that the market will rise substantially on the day, you might be more attracted to a binary on the FTSE closing more than 10 points up on the previous day, which could have odds of 61-66. While this is obviously an increased ‘handicap’, this proposition allows the savvy trader to more readily capitalize on his position and to put his analytical skills to good use in generating a strong return on his investment.

Handicap bets can be an excellent next step for the trader looking to capitalize on market movements beyond the most simple of binary bets. While harder conditions to satisfy, as the name implies, handicap bets nevertheless deliver an enhanced return to the trader, and are thereby favoured in some instances amongst savvier binary bettors.

One of the most common bases on which binary bets are offered is over the course of the trading day, known as ‘daily’ bets. Daily bets, in contrast to hourly bets, examine the movement of the markets over the course of the trading day from the point at which the trader enters the market. While this leaves much scope for markets to fluctuate, it can also be a valuable trading style insofar as it provides a degree of insulation against intraday fluctuations in the market which can be caused by any number of external reasons.

A daily bet sets up the proposition that by the close of play the market will either finish up or down. For traders relying on the external factors that drive market performance, daily bets often set them up with the scope to fully realize their forecast movements, protecting against temporary blips in pricing that can cause problems for binaries taken over a shorter period of time.

Another common type of binary bet is the hourly bet, which is effectively the same as the daily bet with the exception that it operates on a much shorter timescale. Hourly bets, as the name suggests, take place over the frame of a given hour, such that when the hour closes the bet is settled up or down to 100 or 0. This is perfect for traders with a shorter-term outlook who are interested in scalping their profits and moving on to another trade, and allows traders to capitalize on particular announcements as they impinge on market performance where otherwise the day’s trading might see the market fall.

Of course, deciding on whether to opt for a daily or hourly bet is entirely dependent on the circumstances that present themselves, and for the trader looking to leverage binary betting to the fullest extent, having a command of both mediums is particularly handy.

It may well be the case that an hourly bet presents better odds, given that the volatility in the markets can make it less easy to forecast than daily trading performance, or perhaps the short-term volatility could make a day bet a more attractive, more prudent option. Either way, having a working knowledge of daily and hourly binaries can pay dividends when it comes to trading for real.

In addition to the standard types of binary bets on offer, the markets have grown to offer a range of special alternatives, which satisfy the demand from traders for more diverse, more flexible trading instruments. The impact of these so-called ‘specials’ is to provide traders with the means to bet on more diverse outcomes, which can add an enhanced degree of flexibility to binary trading, whilst allowing traders the ability to capitalize on a variety of different trading scenarios.

One Touch

‘One touch’, also known as ‘American binaries’ stipulate a certain price point the market must break at some point over the defined trading period. If the market does break that certain limit and the trader has bought on that basis, he will profit from the transaction, which will settle at 100 as normal. If the market fails to reach that defined point, even if the market does in fact rise on the day, the bet is settled at 0. One touch bets are a great way of factoring in the extent of market movements, particularly in response to third party economic indicators and announcements which might have a dramatic but temporary effect on the day’s trading. An example of a one touch bet might be whether the FTSE 100 will touch 5750 over the course of the trading day.

Ladders

A so-called ladders binary specifies that the market has to have risen beyond a certain level at some given point over the trading period. For example, a ladders bet could stipulate that the FTSE should rise to beyond 5750 by 3pm for example, with the same binary outcome as in other binary bets – if yes, the market is made up to 100, and if no, the market is made up at 0. This allows traders to factor in both the price rises the market is likely to foresee and a time-sensitive component. This is obviously a less obvious market movement to call, but it nevertheless pays better odds than comparatively more straightforward binaries, so it’s a case of weighing up the numbers to decide whether a particular ladders bet works for you.

Tunnel

Similar to the ‘one touch’ in many respects is the ‘tunnel’ bet. Whereas the one touch bet is good for picking out factors that might cause the markets to peak beyond their opening and closing rates and their normal rates, the tunnel bets are the inverse – that is, the market must stay within set parameters throughout the duration of the bet, be it an hour, a day or a week. The tunnel bet allows traders to capitalize on markets that are perhaps less volatile than others, whilst enabling a binary position on markets that stay within their predefined limits.

Hi Lo

Hi Lo bets work on the basis of a certain range quoted, from which the days market highs and lows must be in order for a buy bet to be settled favourably. For example, a hi lo binary might stipulate that the day’s market high should be more than 20 points beyond the previous day’s high. Again, this is a harder binary bet to call, but it nonetheless pays better odds for a successful trade.

Short Term Bets

Amongst some of the more popular specials on offer through binary brokers of all shapes and sizes are short-term bets. By short term, don’t think weeks. Don’t think days. Don’t even think hours – short term binary bets play out over the course of minutes, which makes for an ultra-volatile market dynamic and one of the fastest, most energetic forms of binaries trading.

This can be a particularly lucrative and also particularly risky market to get involved in, with potentially thousands gained and lost in the space of just a few minutes. Nevertheless, it allows traders to jump on board ahead of time sensitive conditions, such as particular economic announcements, to ride the wave of especially short-term price movements. Naturally, the odds for this can be particularly rewarding, although it can be impossible to call the direction that the markets might move in such a short space of time.