Binary Spread Betting is a financial trading strategy introduced by firms specialising in Spread Betting. It serves as an alternative method for market speculation and offers the added benefit of tax-free profits. To understand how Binary Spread Betting operates, continue reading this article for a thorough analysis.
Binary spread betting offers a simple “yes/no” approach to speculating on the markets with fixed risks and profits. In this guide, I’ll explain binary spread betting, its benefits, and how to use them as part of your strategy.
- Binary spread betting simplifies the way to speculate on the direction of market movements, making it as simple as betting on the market to go higher or lower after a specific time.
- With spread betting, you have fixed returns and maximised losses, so you know your maximum losses and profit potential with each bet.
- There is no commission or leverage with binary spread betting, making it more accessible to various bettors.
- You can binary spread bet on a range of markets, including forex trading, indices, and commodities. However, the range is limited compared to spread betting.
Binary Spread Betting Explained
Binary spread betting offers a simplified way to speculate on the direction of market movements that boils down to a “yes” or “no” if the movement surpasses a certain price within a specific timeframe.
The market will be priced from 0 to 100, and you will be given a price to enter depending on how close the current market is to being above or below the binary bet’s strike price. When the binary bet finishes, it will end at either 100 (if it is above the strike price) or zero (if it is below).
Binary Spread Betting Example
Let’s say a binary spread bet is available on FTSE 100 to finish above 7000 by market close, and the current market price is 6980. This position’s binary spread bet price is 55, and you choose to stake £1 per point, meaning you would need £55 to open this bet. If the FTSE 100 finishes above 7000 at market close, the binary spread bet will finish at 100, and you would profit 100 – your entry price (55), meaning your profit is £45 (100 – 55 = 45). If the FTSE 100 fails to reach its strike price, you will lose your entire stake (£55).
There are some considerable advantages to binary spread betting that makes it appealing; these are:
Fixed Returns & Capped Losses
With spread betting, your profits and losses are generated by how much the market moves in your favour and profit from the stake size x the number of points moved. In contrast, binary spread bets have capped returns limited to the difference between the entry price and 100. Equally, if your prediction is wrong, you only lose the stake amount (preventing the potential of an unlimited loss potential).
Simplifies The Execution Process
With binary spread betting, you simply choose the market you want to bet on and the timeframe, then bet on whether the price will be higher or lower. You also know your maximum loss (your stake) and your maximum profit (100 minus your entry price), making it easier to understand in terms of risk and reward opportunities.
I should note that the oversimplification of trading limits the control that spread betting offers, such as being able to keep a position open for longer to capture larger profits.
With binary spread betting, you will only pay the spread of the binary market, meaning you do not pay any commissions.
Because your total risk is the binary market entry price times your stake per point, your risk is known upfront and is your maximum loss. You do not need leverage or margin to enter the market.
Despite its allure as a simplified and potentially lucrative trading option, binary spread betting has drawbacks. Traders should carefully consider the following disadvantages before venturing into this realm of financial speculation:
Fixed Profit Potential
With capped profit potential, it squanders your ability to maximise your trades when they are successful. It also means you must be consistently profitable as your rewards will be capped while taking losses means you lose 100% of your bet. Generally speaking, it could take two back-to-back losses to wipe out your profits, which isn’t ideal when betting on the markets.
Time Constraints and Short-Term Focus
Being able to analyse the markets and predict if the market will rise or fall is an art, but being able to do it and say whether it will be within a specific timeframe is luck. Binary spread betting focuses on these short timeframes to generate impulsive bets in the hope of making a quick profit; I personally avoid them because of this alone.
Potential For Overtrading
Spread betting binaries a simplified “yes” or “no” on market movements within a short-term time frame; this immediate gratification of quick profits can be addictive and can lead you to make irrational decisions.
Why Is Binary Options Spread Betting Popular?
Binary options trading became popular because of the product’s simplicity made by speculating on the markets. It had quick profits with relatively high payouts, allowing you to profit by simply being correct without being accurate, and you could bet on a range of markets consecutively. This made binary spread betting attractive to beginners as you could start with very low bet sizes (£5 minimum stake), and the fixed maximum loss is limited to your stake, making it an ideal product if you are risk-averse.
This article focuses on binary spread betting, which has properties similar to binary options (style of bets, how they work, etc.). However, you are staking a fixed sum per point made during the binary bet, while in binary options, you place a stake, and your outcome is already fixed to 80% profit potential.
How Binary Spread Betting Works
The advantage of binary spread betting is how simple it is to enter the markets. Below, I’ve outlined how it works step by step:
Choose A Broker
At CompareForexBrokers, we have gathered data on many spread betting companies and tested them against our strict methodology to find the best spread betting brokers. Most no longer offer these products; however, IG Group and Spreadex are the best spread betting brokers offering spread betting options.
Choose Your Market
The broker will create a market specifying the binary spread bet expiration date and time, the strike price, and the price to enter the spread bet. You will find that the broker will offer many binary bets with different strike prices and expiration times; choose the one that fits your analysis.
Buy or Sell the Binary
Based on your analysis, you will decide whether to buy or sell the binary spread market. If you think the market will rise above the strike price set, you will buy, and if you do not, you will sell the binary spread bet.
When you have made your choice, you will buy (or sell) the binary spread bet price offered by the broker. This figure will be between 0 and 100 and vary depending on the likelihood of the outcome occurring. The closer to 100 the price is to enter, the higher the probability and vice versa.
How To Calculate Profit
To profit from the binary spread bet, the market has to close above the strike price if you buy the spread bet. This would then result in the bet closing at 100. Or if you predicted the market would not close above the strike price, the spread bet would close at 0.
Your profit is generated from the close price minus your binary entry price. So if the binary bet won and you bought a binary at 50, it would mean you would profit 50 points (100 minus 50). If you sold the binary option and it won, you would make 100% of your stake as profit.
How The Binary Spread Bet Loses
If you bought the binary spread bet and the underlying market never exceeds the strike price at expiration, the position will be worth 0. Should this be the case, your loss would be your stake, so if you staked £50, you would lose the total amount.
Losing on a sell binary option is the same, should the underlying market fail to fall lower than the strike price, you will lose your total stake too.
A Winning Binary Spread Betting Trade
Let’s say the broker has a binary market on gold to close above $1850 ( the current market price is $1839), and the broker offers a buy price of 48 on this binary market. You take the buy price and stake £1 per point for gold to close higher than $1850 by market close.
Gold closes at $1854 above the target of $1850, meaning your binary spread bet won. Your profit is 100 (total binary outcome) minus your buy price (48) times your stake per point (£1) or (100 – 48) * 1, making you £52 profit.
A Losing Binary Spread Betting Trade
This time, the broker has a binary market on the S&P 500 index to close above 4250 (with the current market at 4246) that expires at market close and offers a buy price at 68 for the binary spread bet. You buy at the 68 price for £2 per point to close higher than 4250 by market close.
The S&P500 closes at 4235, below the 4250 strike price, meaning the binary spread bet lost. Your loss is your stake, which is the price you bought times the stake, and in this example, it is 68 x £2 = £136 loss.
The Different Styles of Binary Bets
Although binary spread bets have simplified the approach to speculating on the markets, you can use different types of binary bets that allow you to profit based on different circumstances. These are:
These bets are the standard bets and are what I have been discussing throughout this page. In the high/low bets, you predict whether the underlying market’s price will be above (high bet) or below (low bet) the strike price at expiration
- Simple and straightforward to understand
- Suitable for beginners and experienced traders alike
- Offers a fixed payout, regardless of how far the price moves in the desired direction
Touch/ No Touch Bets
Unlike High/Low Bets where your bet runs until expiration, touch bets will profit and close if the underlying market “touches” the strike price. Likewise, the no-touch bet is when you don’t want the underlying market to touch the strike price within the bet’s timeframe. They offer the potential for higher payouts but also carry an increased risk, as the price may not reach the touch level.
- Potentially higher payouts compared to high/low bets
- It can be used to hedge against other positions
- Offers more flexibility in terms of market movements
Range bets differ from high/low bets as you do not want the markets to trade higher or lower than the specific range. These bets have two levels, the upper and lower boundary, where the underlying market price must close between by expiration. If the market closes within the boundaries, you make a profit, while if the market is higher than the upper boundary (or lower than the lower boundary), you will lose. Range bets allow you to profit from consolidating and sideways market movements.
- Suitable for trading in sideways markets
- Offers protection against volatile price swings
- It can be used to profit from consolidation periods
Available Markets for Binary Betting
A wide range of markets are available to binary spread bet on, but only the most popular assets are available. These include:
- Forex pairs: These are generally limited to just major pairs.
- Commodities: You can use binary gold, silver, and oil bets.
- Stock Indices: Assets like S&P 500, FTSE 100, and DAX 40
If you want to bet on markets like forex minors or stocks, you should consider using spread betting instead.
Binary Spread Betting vs Binary Options
Binary options and binary spread betting are similar methods to speculate on a binary outcome of a market. However, there are some differences you should know:
Fixed Returns vs Variable Returns
Profits from binary options are fixed at the payout rate depending on the style of binary option you choose, and this can range from 65% to 90% payouts if your binary option wins.
With binary spread bets, your profits can vary depending on the binary market price you entered and the stake per point you bet. For example, if you entered at 50 and it won, you’d win 50 times your stake per point back, which would be similar to a 100% payout on a binary option.
Or if you entered at 85 and it won, you’d win 15 times your stake per point, reducing the ROI but increasing the probability of you making money. You could even buy a binary bet at 15 and still win, making you 85 times your stake per point back. These produce the highest profits but have the lowest probability of winning.
Both Have Fixed Risks
Both binary spread betting and binary options have a maximum risk based on your stake; they are just worked out differently. With a binary spread bet, your maximum loss is the binary market price (let’s say it is 65), and you times this by your stake (£1) per point. This means your maximum loss is £65, regardless of how wrong your prediction is.
In binary options, you simply stake how much you want to risk, let’s say £10, which is similar to fixed-odds sports betting. Your maximum loss is £10, no matter what.
Both Are Not Leveraged Or Traded With a Margin
Neither product requires margin or leverage, as you are betting on a binary outcome with a fixed profit potential.
Binary Options Are More Flexible For Small Accounts
With binary options, you can open a bet with any stake size you desire, and they do not have binary market buy or sell prices. This means you simply enter the stake size and wait for the binary outcome and can use the same stake size every time. Meanwhile, with binary spread betting, you have to cover the binary market price times your stake per point price, which can vary every time.
- You will have learned that binary spread betting simplifies market speculation into a “yes/no” format, making it more accessible to traders with less experience.
- Understand that there are no additional fees or commissions when binary spread betting, keeping the trading fees in line with spread betting.
- You’ve learned that binary spread betting has fixed returns and losses, allowing for controlled risk but limited profits.
- That binary spread betting is very short-term focused, with the markets closing within hours or at the end of the day.
Binary Spread Betting FAQs
Is Spread Betting Legal?
Yes, financial spread betting is legal and is regulated by the Financial Conduct Authority (FCA), which all brokers that offer spread betting markets must be regulated by.
What Trading Platforms Use Binary Spread Betting?
Binary spread betting is only available on a broker’s proprietary spread betting trading platform as these types of financial markets are incompatible with MetaTrader 4, MetaTrader 5, cTrader or TradingView betting platforms.
Is Spread Betting Tax-Free?
Profits generated with spread betting are tax-free because the activity is classified as gambling according to the HMRC, meaning the winnings are exempt from capital gains tax. The FCA regulates and is a derivative, which means it benefits from being exempt from stamp duty, making spread betting tax-free in the UK.