Different Assets in Binary Options Trading. Trade on Gold, Stocks & More

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Arbitrage Strategies With Binary Options

Arbitrage is the simultaneous buying and selling of the same security in two different markets with an aim to profit from the price differential. Owing to their unique payoff structure, binary options have gained huge popularity among the traders. We look at the arbitrage opportunities in binary options trading.

A Quick Intro To Arbitrage

Suppose a stock is listed on both the NYSE and NASDAQ stock exchanges. A trader observes that the current price of the stock on the NYSE is $10.1 and that on the NASDAQ it is $10.2. She purchases 10,000 of the lower-priced shares (on the NYSE), costing $101,000 and simultaneously sells the same quantity of 10,000 higher-priced shares, costing $102,000. She manages to pocket the difference (102,000-101,000 = $1000) as profit (assuming there is no brokerage commission).

Effectively, arbitrage is risk-free profit. At the end of the two transactions (if executed successfully), the trader is not holding any stock position (so she is risk-free), yet she has made a profit.

Options Arbitrage

Options trading involves high variations in prices, which offers good arbitrage opportunities. While stocks may need two different markets (exchanges) for arbitrage, option combinations allow arbitrage opportunities on the same exchange. For example, combining a long put and a long futures position results in the creation of a synthetic call, which can be arbitraged against a real call option on the same exchange. Effectively, assets with similar payoffs are arbitraged against each other.

Additionally, other variations in arbitrage exist. A long position in a stock can be arbitraged against a short position in stock futures. Arbitrage opportunities can also be explored between correlated commodities and currencies (examples follow).

Binary Options

While the plain vanilla call and put options offer a linear payoff, binary options are a special category of options that offer “all-or-nothing” or “fixed price” payoffs.

Here is the graphical representation of the difference in payoffs between the two:

The linear (and varying) payoff from plain vanilla options allows for combinations of different options, futures, and stock positions to be arbitraged against each other (and a trader can benefit from the price differentials). The fixed payoff of binary options limits the combination possibilities.

The key idea of arbitrage is simultaneously buying and selling assets of similar profile (synthetic or real) to profit from the price difference. One of the biggest challenge with binary options is that there are hardly any assets that have a similar payoff profile. Trying combinations involving different assets to replicate the binary option payoff function is a cumbersome task. It involves taking multiple positions—something that is very difficult for timely trade execution and costs high brokerage commissions.

Arbitrage Opportunities in Binary Options Trading:

Within the above-mentioned constraints, the arbitrage opportunities in binary option trading are limited. Finding similar assets to simultaneously arbitrage against is difficult. The best available option is to go for time-based arbitrage. It involves identifying a market discrepancy, taking a position accordingly, and then booking the profits after some time when that discrepancy gets eliminated or the price target/stop-losses are hit.

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NADEX is the popular exchange for trading binary options. Keep in mind that other markets for stocks, indices, futures, options, or commodities have different (and limited) trading hours. Multiple assets (stocks, futures, options) trade at different times of the day depending upon the exchange-enabled trading hours. Developments that happen when a market is closed may lead to rapid moves in prices when the market opens.

For example, there may be a news item that affects the FTSE 100 stock index and comes out when the London Stock Exchange (LSE) is closed. The exact impact of such news on the FTSE 100 index will be visible only when the LSE opens and the FTSE starts updating. Until then, speculations will be high about the perceived impact of the news on the FTSE’s value.

This index is the benchmark for trading binary options on NADEX. Since binary options trading is available for extended hours, a lot of volatility and price moves as a result of the news may be visible in FTSE binary options.

Suppose the LSE is currently closed and there are no updates to the FTSE index (last closing value was 7000). Assume last price for binary option “FTSE > 7100” was $30. As a result of the developing news, the FTSE is expected to rise once the market opens (say five hours from now), and this binary option value will start to rise (and fluctuate) from the current price of $30 to $50, $60, $70 and so on. Since there is no certainty about what will be the exact FTSE value when it will open for trading, the binary option prices will fluctuate up and down. During this time, experienced traders can bet their money on FTSE binary options for time-based arbitrage.

Once the market opens, the actual change in the FTSE Index values and FTSE futures prices will be visible. That will lead to FTSE 100 binary options prices to move towards accurately reflecting FTSE 100 values. By that time, experienced traders could have spotted overbought and oversold conditions in the binary options market and made profits (possibly couple of times).

Other binary option arbitrage opportunities come from correlated assets, such as the impact of commodity price changes that lead to currency price changes. Usually, gold and oil have an inverse correlation with the US dollar (i.e., if gold or oil prices rise, then USD currency weakens and vice versa). Experienced traders can look for arbitrage opportunities in associated forex binary options in such scenarios.

For example, a trader observes that gold prices are rising. He can short sell US dollar by selling the USD/JPY pair or by buying EUR/USD pair. Similarly, an increase in oil prices can lead to an expected increase in the price of EUR/USD. A binary options trader can take appropriate positions to benefit from these changes in asset prices.

Arbitrage in other binary options, such as “non-farm payroll binary options”, is difficult because such an underlying is not correlated to anything. One can still attempt time-based arbitrage, but this would be solely on speculation (e.g. take a position as the expiry approaches and attempt to benefit from volatility).

Binary Options: Better for Arbitrage?

High volatility is a friend of arbitrageurs. Binary options offer “all-or-nothing” or “fixed price” profit ($100) and loss ($0). Like plain vanilla options, there is no variability (or linearity) in returns and risks. Buying a binary option at $40 will result in either a $60 profit (final payoff – buy price = $100 – $40 = $60) or a $40 loss. Any impact of news/earnings/other market developments will lead the price to fluctuate (from $40 to $50, $80, $10, $15, and so on).

Arbitrageurs usually don’t wait for binary options to expire. They book the partial profits or cut their losses before. Since binary options have fixed price flat payoffs, any change in the underlying value can have a big impact on returns.

For example, if the FTSE closed at 7000, and the binary option FTSE>7100 was trading at $30, and then positive news about the FTSE comes out. The FTSE reaches 7095 and is hovering around that level in a 10-point range (7095-7105). The binary option price will show huge variations, as just a one-point difference in the FTSE can make or break the win-loss payout for a trader. If the FTSE ends at 7099, the buyer losses the premium he paid ($30). If the FTSE ends at 7100, he receives a profit of ($100-$30 = $70). This -$30 to +$70 is a huge variation based on a one point limit of the underlying (7099 to 7100), and that leads to very high volatility for binary option valuations, creating huge price swings for active binary option traders to capitalize upon.

The Bottom Line

Standard arbitrage (simultaneous buying and selling of similar security across two markets) may not be available to binary options traders due to a lack of similar assets trading across multiple markets. Arbitrage opportunities in binary options are to be picked from those available during off-market hours in associated markets or correlated assets. The unique “all-or-nothing” payoff structure of binary options allow for time-based arbitrage opportunities. High variations enable high profit potentials, but also bring in large potential for losses. Due to its high-risk, high-return nature, binary options trading is advisable for experienced traders only.

What You Need To Know About Binary Options Outside the U.S

What Do You Need To Know About Binary Options Outside the U.S?

Binary options let traders profit from price fluctuations in multiple global markets, but it’s important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.

Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes.

The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors “to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.” 

Key Takeaways

  • Binary options have a clear expiration date, time, and strike price.
  • Traders profit from price fluctuations in multiple global markets using binary options, though those traded outside the U.S. are structured differently than those available on U.S. exchanges.
  • Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange.
  • While typical high-low binary options are the most common type of binary option, international brokers typically offer several other types of binaries as well.

Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices, and expiry dates. Negatives include non-ownership of the traded asset, little regulatory oversight, and a winning payout that is usually less than the loss on losing trades.

Understanding Binary Options Outside the U.S

What Are Binary Options?

Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities, and foreign exchange.

These options have a clearly stated expiration date, time, and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, they are paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.

The binary options trader buys a call when bullish on a stock, index, commodity, or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time.

The broker discloses the strike price, expiration date, payout, and risk when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.

Binary Options Outside the US

Foreign Versus U.S. Binary Options

Non-U.S. binary options typically have a fixed payout and risk and are offered by individual brokers rather than directly on an exchange. These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an “all-or-nothing” payout structure.

Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).

The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008.   The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC.

These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration.

They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.

High-Low Binary Option Example

Your analysis indicates the Standard & Poor’s 500 index will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis.

You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.

Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules.

In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment.

If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.

Other Types of Binary Options

The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well.

These include “one-touch” options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time.

Meanwhile, a “range” binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.

As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, the risk and reward is always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.

Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won’t lose their entire investment.

The Upside and Downside

Risk and reward are known in advance, offering a major advantage. There are only two outcomes: win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: Is the underlying asset going up or down?

In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.

On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses.

While payout and risk fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades cost the trader more than they can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.

Binary Options – Trading

Binary options trading Course for free! One of the simplest most popular trading methods. The Binary options trading is one of the most popular methods of investment these days, and now you can learn how to trade with binary options, and it is for free! This new appealing trading method is based on a simple ‘yes’ or ‘no’ answer on assets from forex, the stock market, commodities market and more. Learn in this 6 lessons course the terms and concepts, the way of trading options, pros and cons of binary options trading and advanced formulas to invest strategically. A few tools that will help you finish the course successfully and get the most out of the app: 1. Schedule lessons times and reminders – You can set the time and days of the week in which you want to use the time learning, and the app will remind you. 2. Notes tool – a place to write your notes and your thoughts about the course. 3. Easy navigation between different topic and lessons. 4. Sharing button. Complementary bonuses: a course of forex investing, technical analysis, stock investing and commodity investing inside! Download now.

Binary Options – Trading

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Binary options trading Course for free! One of the simplest most popular trading methods. The Binary options trading is one of the most popular methods of investment these days, and now you can learn how to trade with binary options, and it is for free! This new appealing trading method is based on a simple ‘yes’ or ‘no’ answer on assets from forex, the stock market, commodities market and more. Learn in this 6 lessons course the terms and concepts, the way of trading options, pros and cons of binary options trading and advanced formulas to invest strategically. A few tools that will help you finish the course successfully and get the most out of the app: 1. Schedule lessons times and reminders – You can set the time and days of the week in which you want to use the time learning, and the app will remind you. 2. Notes tool – a place to write your notes and your thoughts about the course. 3. Easy navigation between different topic and lessons. 4. Sharing button. Complementary bonuses: a course of forex investing, technical analysis, stock investing and commodity investing inside! Download now.

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Binary options trading Course for free! One of the simplest most popular trading methods. The Binary options trading is one of the most popular methods of investment these days, and now you can learn how to trade with binary options, and it is for free! This new appealing trading method is based on a simple ‘yes’ or ‘no’ answer on assets from forex, the stock market, commodities market and more. Learn in this 6 lessons course the terms and concepts, the way of trading options, pros and cons of binary options trading and advanced formulas to invest strategically. A few tools that will help you finish the course successfully and get the most out of the app: 1. Schedule lessons times and reminders – You can set the time and days of the week in which you want to use the time learning, and the app will remind you. 2. Notes tool – a place to write your notes and your thoughts about the course. 3. Easy navigation between different topic and lessons. 4. Sharing button. Complementary bonuses: a course of forex investing, technical analysis, stock investing and commodity investing inside! Download now.

Best Binary Options Brokers 2020:
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  • Binomo
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