Pure binary options are financial instruments. Similar to vanilla options, they have a strike and an expiry. A financial instrument can be traded on its whole lifetime, from birth to expiry, both ways, either by buying or by selling
A bit of history, in the beginning
I'll begin with what Martin Kay told me, that "we're not here to stain all the industry". Well, 99% of the industry did not exist up until a few years ago. I don't remember them existing in 2008, I think. The actual "industry" of nowadays was made of a few brokers, like TradeRush, Banc de Binary, a few small boats navigating unsure on the "mare nostrum" that was the retail binary options realm belonging to the Roman Empire of the times, BetOnMarkets.com.
BetOnMarkets was the very first "binary broker", and still exists, though less known, a pale shadow of what it was. It opened doors in about 2003, while binaries, as well as the whole exotics class, were invented a few years earlier, in the dark laboratories of Goldman Sachs.
For a long time I wanted to trade with BetOnMarkets. But, they designed their products in such a manner that made not quite possible to trade in a normal fashion. In the beginning, the product offer was quite rich, but in time, along with several interface upgrades, a lot of products were removed, and we're gonna return later at that.
The newest additions seem to be GFT and SaxoBank, that crack open the door a bit more. They both come with pure binaries, but this is not enough. Products are better on GFT, but both platforms are very much in quite initial state, far from the level of customization that would be good.
Pricing is almost everything
When you're shopping, you're checking the pricing. You wouldn't buy a product, if you wouldn't agree that the price is fair, matching the value of the product you buy. For instance, would you buy an apple from me for 10 bucks ? No, because you feel that you pay too much on it.
A binary option's value is the probability for the option to expire in-the-money (ITM), winning. Therefore, the value is between 0 and 100 (%).
A binary option's price is constructed around the value, by adding or subtracting half of the spread. For instance, if the value is 50, for a 50% chance, you should pay about 55%, to buy this option, or you should get about 45%, to sell the option.
Let's remember what binary option trading means:
When you buy a binary option you pay upfront, in order to get either 100% (if the option expires in-the-money), or, to be able to sell it later, at a better, higher price.
When you sell a binary option you cash in the price, in order to keep the full price, if the option expires out-of-the-money (OTM), or worthless, or to be able to buy it later, at a better, reduced price.
So, let me create a few prices for you to understand. We'll discuss these prices in the context of a One Touch option. The option has a payout of 100, in the case of a touch, and 0, in the case of a No Touch. First is price is for touch the high target, second price is for touch the low target.
I) 3/0 & 3/0
Sell price is 0, Buy is 3. Buying a strangle costs just 6. 6 is nothing. If prices start moving, you might be able to at least sell one of them at 10 and cover the whole loss.
II) 7/0 & 7/0
Here, a strangle costs about 14. Could you at least sell one of the options at 14, to cover the loss? Is there gonna be enough price movement to allow this? Or it doesn't matter now? You see the chart, you expect an exit of a symmetric triangle soon. Pay a few 14s, say it 3-4 times in a row, and then bang! Market violently moves out, get 100 payout and make about 60 net profit...
III) 12/0 & 12/0
Would you really pay 24? Unless news are not coming during the strangle's lifetime, are you at least able to be flat at the end? Pretty risky, but you could go on this one.
IV) 24/10 & 24/10
News are coming! Pay 48 on the strangle! Are you absolutely sure? Remember you have to overcome a total spread of say 32. If nothing will happen, soon the decay will consume the strangle and you'll strive to at least save about 20 from the total loss!
IV) 100/75 & 16/0
What do you think, sell at 75? Risk 25? How many times did that screw you until now? 4 times a similar one, and 100 bucks are gone!
V) 100/84 & 12/0
Sell at 84, risk just 16 to make 84... But that is big! How far is that from the strike? How fast did it move until now? But what's the risk? How far from the strike? How much time until expiry? How does the chart look?
VI) 100/87 & 10/0
13 bucks, big deal! You can lose 6 times in a row on this one and still make money! But trading this stupidly, when you know there is no chance, will still eat your account on a volatile day!
It just doesn't matter. Risk 3 to make 100. How many percentages is that?
3333% ? Is there any broker to give you this?
What do you think about this one? (Screenshot of GFT Dealbook Web from the summer)
I don't remember, I don't think I traded it. Volatility was huge, look at the chart, 5 ticks up and down is just a tiny interval off the big chart. Alas, selling both of them would have created 109.3 income and risks of 200 (in case of double touch). Most likely one would have failed with a touch and net profit would have been 9. And that, provided that there was no slippage. With slippage, we can consider a loss about 26 (the sell @73.1 is accepted by the engine in a case of a touch, because the option values 100 and I sold mine for 73.1, while the other, @36.2, would probably go down to 15 or something, becoming cheaper, thus trade might have gone rejected by the server).
Also take note of the spread, which is less than 7 points. Now is 12 to 16 points.
As in other forms of trading, you can keep the instrument in your portfolio for a while, and then throw it away, if you believe your expectations will not be met. Say you believe EURUSD will rise. As a forex trader, you would buy it. It goes up 40 pips, but you thought 100. Then it starts to lose. It loses about 15 pips. You decide it's enough, you profited enough from your expectation, it's time to sell and take profit.
Trading of any instrument is based on buying and selling the instrument at any time, thus riding the market price of the instrument.
With regular binary brokers, such gameplay is not possible. Even if you were right for a while, even your "option" is pretty much in-the-money right now, you cannot sell, you cannot close the trade.
Each binary option type has an opposite option type. This way, Up has the opposite of Down, One Touch has No Touch, Either Touch has Double No Touch, Double Touch has No Double Touch.
A short list of what brokerages have done: 1. Binary options have lost their instrument nature
Binary options have become bets. Since strike is current underlying price (for up/down), or current underlying +/- x ticks for ladder options, you don't trade an instrument anymore. You put a bet on! And since there is no value involved, because the payout is fixed, the value forms up only in your mind, as a result of your market analysis. But there is no way to take advantage of your trades for a while, and exit at the precise moment when needed.
2. Sell function has been generally prohibited
When you put a wager, you pay, you don't cash in. You cash in only if you win. The thing is, the opposite bets don't quite exist. Except for Up/Down. One Touch targets exist at X ticks, but No Touch is does not exist, so that the trader wouldn't have the possibility to buy a No Touch in order to do the same thing as selling a One Touch.
3. Liquidation has been restricted
Some brokers, like BetOnMarkets, allow later selling, and they even have (or had?) a trigger mechanism. Like "If price touches X or Y then sell the option". These triggers were extremely restrictive. You couldn't put whatever price you wanted as a trigger. Added to that the "OR" condition of the trigger is too less adequate to automating a strategy.
4. There is no control on pricing
Who says there must be a 70% payout or a 80% payout? And who needs 15% cash back on a failed trade if the pricing is fair? Isn't this 15% a sort of consolation prize so that you don't feel ripped off? Who tells the touch levels or the ladder levels aren't too far and you end up paying constantly too less for what you get?
If an option is not continuously quoted on both prices, they can give you how much they want for it. If a BetOnMarkets option trigger would have triggered, there was nothing to tell me how fair was the price at which would have been sold.
Last edited by fxeconomist; 01-15-2013 at 08:47 PM.
There is no real way to hedge expiry options like the Ladders, for instance.
As for the touchies, the best instrument to trade would be Double Touch.
The opposite of a Double Touch creates the best setup for a binary trade. Quite a dream. Double Touch pays out if the two barriers, the low and the hi, are touched until expiry. When sold, the objective is to see the option expiring worthless, therefore, the two strikes must not be touched, but it's no problem if only one of them is touched. Many websites consider that the opposite of a Double Touch is Double No Touch, but that is either by mistake or deceit. The buyer of a Double No Touch option is a prisoner that will take a full loss on either of the barriers getting touched. I call the opposite of it No Double Touch. For a brief period of time, it existed at BetOnMarkets under the name "Double Contra".
See the following cases for selling a Double Touch or buying a No Double Touch (**corrected after edit):
This option offers best possible hedge available. Should any of the barriers be touched, one could simply hedge by buying the One Touch for the other barrier. Except for the volatility, all factors concur to the benefit of the trader. When one of the barriers is touched, the touch event will happen after some time, therefore theta is consumed off the one touches, more or less. At the same time, the underlying is far away from the One Touch you wish to buy. The more later the touch event happening, and during weak underlying volatility, with underlying going slowly in one direction, the cheaper the hedge. The strategy doesn't quite need any other automation and it could be played almost regardless of the time left to expiry. Probably one could even find software to send an SMS or email the moment the touch event happens.
Double Touch is listed explicitly as available option for trading on Fenics Exotics, Vcap and BankMuscat (a banking giant from Oman); probably there are other institutional providers, but I don't know of any retail one. After 2008 , BetOnMarkets removed the entire Double class, with both Double Touch and Double Contra.
I don't know any other provider to offer them.
But again, I stress the problem of pricing. Somebody may give you whatever option you desire. Not having any control on their pricing is being at their mercy. And I bet they have a lot of women and cars to buy with our hard earned money that we finance our accounts with. Let's not let them have an easy life with our money!
Last edited by fxeconomist; 01-15-2013 at 02:15 PM.