To complement our series of spread betting guides we thought we’d introduce you to the other form of financial betting: fixed odds binary betting, which is offered by a few companies including Bet On Markets, Ladbrokes, and Option Fire. It’s similar to spread betting, but not the same.
Similar to Spread Betting
It’s similar to spread betting in the sense that you can bet on whether a range of markets – stock indices, currencies, commodities and some individual equities – will go up or down in price. Just like spread betting, your ‘wins’ should be tax-free (in the UK at least) because you’re gambling rather than investing and you can’t offset your losses. If the word ‘gambling’ sends a shiver down your spine, let us tell you that it is possible to practice safer fixed odds binary betting just as it is possible to practice safer spread spread betting.
…but Not The Same
What’s different about fixed odds binary bets is that they are more like financial ‘options’. You set a price that you think your chosen market will be higher or lower than at a specific point in time in the future. If the market price sits the right side of your target price at the expiry time, you win the payout that you agreed at the outset, otherwise you lose your stake.
So you either win or lose a fixed amount, and there’s really nothing in between – hence the term ‘binary betting’ – but on some platforms you may be able to cash in your bets early for some accumulated profit… or to take the hit of a small loss before it becomes a bigger loss.
The good thing about it being ‘fixed odds’ is that you know at the outset exactly how much you stand to win as well as having absolute certainty about the maximum amount you could lose. You won’t receive a ‘margin call’ to put up more cash with this kind of betting.
At the time of writing, the Bet on Markets platform is offering the following odds:
A payout of £100 if the US Tech 100 Index is lower than 2100 on 24 August 2011, requiring a stake of £21.55 thereby yielding a potential 364% profit… or a loss of the initial stake.
A return of 95% plus return of the original stake if you guess correctly that the price of Gold will be higher than the current market price (at the time of writing) of 1521.24 on 21 May 2012, or a return of 76% if you guess correctly that it will be lower.
Unlike traditional financial ‘options’ where you will find a limited set of strike prices and expiry dates available, you can pretty much choose any combination of target price and expiry date. But note that not all platforms allow you to place fixed odds bets over such long timescales of up to a year. The Ladbrokes offering, for example, seems to be aimed more squarely at day traders who want to test their mettle against the market on a minute-by-minute basis. That really is gambling!
About the Author
Tony Loton is a prolific trader and financial writer, and author of the book “Position Trading” published by LOTONtech.