So having looked at the underlying principles of binary betting, the binary odds and the two main types of binary bets, let’s now start to look at some simple examples of binary bets and how the binary option will be quoted to you in your live price chart or table.

If we go back to our heads and tails example, then as the coin is flipped in the air, there is an equal chance of the coin landing as a tail or a head, so the binary option being quoted would be 50, in other words an equal chance of either a head or a tail. Now clearly with binary betting, the binary betting company is looking to make a profit from each bet, and for them this is created by quoting a two way price, so in the above example of the coin being tossed the binary bet would be quoted at 49 – 51. The spread between the two prices is the binary company’s profit on the bet, one of which is the buy price ( the higher of the two prices ), and the other the sell price ( the lower of the spread bet price), so when we look at a binary position for a particular outcome it will always be presented in this way with two prices and a spread. As I said earlier, the beauty of spread bets being presented in this way is that we can tell instantly the underlying probability of the event occurring or not, as well as how this probability changes as the underlying event nears completion, or expiry. Below is our first example and in this case the probability is good that the event will occur as it is well over the 50 threshold of balance of probabilities, but remember in the financial betting world, one piece of news or a rumour can change market sentiment in an instant, so nothing is guaranteed!

Now, as I said earlier it is important to realise that you can either agree with the bet or disagree. In other words if you agree with the statement, then you buy the bet, and if you disagree with the bet then you sell. It is as simple as that, so let’s look at a simple example as follows :

  • Binary bet format –  69 – 71. If you think the bet will happen you buy at the higher price of 71. If you think the event will NOT happen you sell at the lower price of 69.

Now it is important to realise in this example that there is a 70% chance ( at the moment ) of the event happening ( i.e. the mid point of the binary) and conversely a 30% chance of it NOT happening. Now in order to help you understand how this relates back to fractional odds which may be more familiar to you, I have some simple comparison of binary bet odds with fixed odds which I hope will help clarify this for you.

  • If you buy a binary bet at 80, then the fractional odds are 4/1 on and the probablity of failure is 20%
  • If you buy a binary bet at 75, then the fractional odds are  3/1 on and the probability of failure is  is 25%
  • If you buy a binary bet at 66.6, then the fractional odds are  2/1 on and the probablity of failure is 33.3%
  • If you buyl a binary bet at 60, then the fractional odds are  6/4 on and the probablity of failure is 40%
  • If you buy a binary bet at 55.6, then the fractional odds are  4/5 on and the probability of failure is 44.4%
  • If you buy a binary bet at 50, then the fractional odds are evens, and the probablity of failure is 50%

So, if we take our fractional odds of 4/1 and we decide to buy this bet  then there is a 20% chance that we will be right. If we decide to sell the bet then the chances of us being right are 80%. In simple terms the higher the binary value, then the more chance there is the event will occur.

Finally, let’s see how we calculate profit and loss for each binary bet trade, for both a sell order and a buy order, as they are slightly different.

Now with binary betting ( as with spread betting ) we have a stake which in effect is the amount we are prepared to bet for each 1% ( or 1 point if you like ) of movement in the position. For all these examples I am going to use 10p and if you are new to this form of trading, then I strongly suggest you start with this while you build up your experience. Let’s assume an event is quoting  43-48 and you have decided to open your first binary bet at 10p per point.

  • Buying a binary bet which wins – when buying, your profit is the closing price minus the opening price times your bet size ( per point) . Assume the binary bet wins and settles at a 100 ( the bet will either settle at 100 or 0) then your profit is 100-48 x 10p = £5.20
  • Buying a binary bet which loses – if we take the same example, but this time the binary bet loses then your loss is the closing price, minus the opening price times your bet size ( per point) which in this case would be 0 – 48 x 10p= -£4.80

Now, lets look at a sell bet and how we calculate the profit and loss for this binary betting example which is slightly different.

  • Sell a binary bet which wins – Here you think the event will not happen so you sell the bet and you are correct. The bet settles at 0, as the event did not occur. When selling the profit is the opening price minus the closing price times the stake, so in this case would be 43 – 0 x 10p = £4.30
  • Selling a binary bet which loses – In this case the position would settle at 100 ( the event occurs) so your loss would be 43-100 x 10p = -£5.70

I hope the above simple binary bet examples have give you a feel for how binary bets work, both in buying and selling the bets and also in how any profit or loss is calculated. Now let’s take a look at volatility and how this affects binary bets in practice.