Clearing and Settlement

A major constraint on starting and operating a derivatives exchange is the
necessary cost of engaging a clearing house. The Eurex and the Chicago
exchanges operate their own clearing houses, which require huge sums
of cash in order to operate their exchanges with financial integrity. Clearly
binary options alleviate this cost since the risk management is a more
exact methodology. This is likely to lead to a proliferation of binary/betting
exchanges globally.
Regulation
Regulatory authorities are placed between a rock and a hard place over
the regulation of binary options exchanges. The nature of the risk involved
means that these exchanges will distribute binary options via the internet
in much the same way as eBay offers everything but bets via the internet.
If regulation in any one jurisdiction becomes overburdensome then the
exchange will up sticks and go offshore.
It is clear that the ability to distribute the product cheaply over the internet
will be a major advantage to the exchange and the binary option
user/trader. The combination of a homogenous, limited-risk instrument
with zero credit facility ensures zero account defaults.
Leverage
The nature of binaries changes sharply as expiry nears. Shares and futures
have linear P&L profiles that lie at a 45º angle to the horizontal axis.
Conventional traded options have profiles that approach an angle of 45º.
A 45º angle means that if the share/future/option goes up by 1¢, then the
owner makes 1¢. A binary approaching expiry has a P&L profile that can
exceed 45º (indeed it will approach the vertical for an at-the-money
option) meaning that a 1¢ rise in the underlying share could translate into
a multiple (say 5¢) increase in value of the option. Clearly this feature is

Introduction
likely to attract the player who is looking for short-term gearing, for it is
safe to state that a binary option can provide greater gearing than any
other financial instrument in the marketplace.
Dexterity
At present financial fixed odds betting suffers from a paucity of available
strategies compared with conventional options. Spreadbetting companies’
binary offerings are usually restricted to the regular upbets, downbets and
rangebets in regular or one-touch/no-touch mode; but this is very plain
fare in comparison to what’s available on the high table of the OTC
market. Knock-Out bets, Knock-In bets, Onions and bets on two separate
assets are all available and over time are likely to, with one handle or
another, enter the trader’s vocabulary. Of course the trading community
will require educating in order that they may use these instruments
proficiently, but this is standard in all new markets. Once the trading
community has a clearer understanding of binaries, there will no doubt
be increased pressure on mainstream exchanges to issue binaries on their
current products – with the CBOT’s introduction of a binary on the Fed
Funds rate the process has already started.
Product Sets
When considering binary options, the usual product revolves around
foreign exchange bets and, more recently, bets on economic data and the
aforementioned Fed Funds rate. Earlier in this introduction sports bets
were proffered as alternative forms of binary options, but the product set
need not end there. Bets on political events are prevalent particularly at
the time of elections. Furthermore, the media is increasingly becoming a
sector where wagers may be placed. Reality TV events are now widely
accepted as a betting medium, but there is no reason why this should not
be extended to, for instance, the film industry. Binary options on weekend
cinema box office takings would no doubt be a welcome hedge for film
producers and nervous actors.

Binary Options
Summary
Although this book steers clear of complex mathematics, it systematically
analyses the anatomy of fixed odds bets. Hopefully this book will:
allow the part-time punter to learn enough to eradicate amateurish
mistakes;
open up the financial and commodity fixed odds market to the sports
betting enthusiast; and
provide enough material and new concepts for the professional binary
options trader to, at the very least, look at combining different forms
of financial instruments with binaries in order to maximise potential
profits and minimise unnecessary losses.