Having looked at the various exotic types of binary bets available, let’s look at some simple binary betting strategies, and for our first example we will construct a bet using the FTSE 100 index, which is one of the most widely traded and liquid instruments in both binary betting and spread betting. In this example we are going to use volatility as the main element underpinning our betting strategy.

It is early in the morning, and having looked ahead to the day’s fundamental news, we believe that the index may react strongly on the news, with some large moves likely, but we are not sure in which direction the index is likely to move, given that the fundamental news could be good or bad! This is a typical trading strategy commonly called the straddle strategy, and one which is widely used in the options world, and for the trade to be successful we need volatility to enter the market, and the same is true in this case. We are betting that volatility will occur during the day, and cause the index to move significantly as a result, but we are not sure in which direction.

As a result we place the following binary bets :

  • Binary bet up: FTSE 100 to finish up more than 50 points is currently being quoted at 10-14
  • Binary bet down : FTSE 100 to finish down more than 50 points which is currently being quoted at 7-10
  • If we decide to bet at £5 per point then our total outlay is ( 14 + 10 ) =24 x£5 and our total loss is therefore limited to £120

Now, let’s suppose we are right and the index moves suddenly following the news and breaks above our 50 point limit for the day, moving strongly higher as a result, then your total profit would be as follows :

  • 100 ( bet closes as a win ) – ( 14 + 10) ( total cost of the bets)  = 76 x£5 for a total profit of £380

Naturally had the FTSE 100 moved lower and not higher, but had still achieved the minimum of a 50 point move on the day, then the outcome would have been the same, with an identical profit or loss profile. Finally, had the FTSE 100 failed to move as expected and achieve our target either way, then our maximum loss on the binary bets would only be £120.

The beauty of this binary betting strategy is that it allows you to trade on volatility in the market without necessarily knowing which way the underlying market or instrument is likely to move, and is often referred to as a directionless trade. You can of course bias your trade if you wish by increasing the weight of one of the binary options simply by betting a larger amount to one side rather than the other, but of course if you are wrong this will also increase your losses.

Finally of course, it is important to realised that we could have taken the opposite view to the above position, and sold the bets, in other words betting against any volatility in the market. This is typically the approach offered by a tunnel or barrier bet,  in which you are hoping that the market continues to trade sideways with no little or no volatile price action to move the underlying financial instrument one way or the other.