Binary Options Trading vs. Financial Spread Betting
Binary options trading is a trend that is taking off around the globe. If you are familiar with financial markets or a forex trader then you have certainly heard of spread betting. Or, if happen to be in the UK, you probably are already somewhat familiar with financial spread betting because of how common they are in the bookies. You can place financial spread bets at your local betting shops and bookmakers.
This page looks to compare and contrast binary options trading and financial spread betting.
Interest in spread betting (red) and binary trading (blue) over time.
As you can see, binary trading is just recently coming into favor and has just now started to reach the levels of spread betting. Binary options are new, exciting and simplified way to trade.
Overview of Spread Bets and Binaries
Binary options and spread bets are similar in many aspects. They both allow traders to predict the price movements of a wide variety of underlying assets and risk money on those predictions. Neither binary options or spread bets actually purchase the underlying asset in question, they both just allow the trader a way to bet on the price movement.
Binary options are fixed risk contracts. This means when you place a binary option trade your profit and loss is fixed and can only turn out one of two ways. You can only win a certain amount or you can only lose a certain amount. This differs from financial spread betting wins and losses can be theoretically unlimited. If you do not set stop losses points to take profit with spread betting then you can win or lose based on the magnitude of price movement. You can learn more about them here. Actually, most of the content on this site is related to trading binaries in some form or fashion.
With binary options your risk and profit are limited. With spread betting you can win or lose depending on the magnitude of movement. With binary trading, magnitude of movement does not determine the payout amount. If you finish in the money by one pip, it is the same as finishing in the money by 50 pips. With spread betting, you would make considerably more money by earning a 50 pip move and considerably less with a 1 pip move as with spread betting you are usually betting a certain amount on each point move in your direction.
- Spread bets – each point that moves in your favor you earn more. Each point that moves against you you lose more.
- Binary bets – as long as you finish in the money you earn the same return regardless of how many points the price moves.
Binary options trading and financial spread betting are quite similar but operate somewhat differently. The main differences arise from the way that trades themselves functions. Both binary options and financial spread betting allow you to make a prediction about an underlying financial instrument and then win or lose money based off of what happens.
Let’s look at binary options first.
Binary options are known as fixed options because you risk a certain set amount of money and when you win, the payoff will be fixed at a certain percentage of your wager. If you lose, the amount of money you get back will also be fixed at a certain percentage. So say you are looking at the price of gold and you think it will go up during the expiry period. You choose High, or Up, or Call (they all mean the same thing) on your binary options trading platform and wager $100.00. If you win the trade and the payout percentage is 75%, you’ll win $75.00 If you lose, and the refund guarantee is fixed at 15%, you’ll get back $15.00 and lose $85.00.
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Now consider how financial spread betting works.
With financial spread betting you are betting on what a financial instrument will do. You can place a similar high or low trade. If you think the price is going up, you buy, if you think the price is going down you sell. The big difference is you do not fix your risk when you select how much money you’re wagering on an outcome with financial spread betting. Instead, your losses or wins can both theoretically be unbounded. This is very much like trading in other markets such as Forex. You place an entry, and your winnings or losses pile up according to a formula as the market moves in your direction or against your trade.
Spread betting takes another level of traders psychology in order to properly let your winning trades ‘run’ and stop your losing trades as fast as possible. With binaries it is a bit different because you can place this trade and walk away until the expiry and see if you won or lost. Your risk is automatically fixed with binaries, you have to fix your risk when spread betting with stop losses.
There are ways you can fix your risk and your rewards spread betting. You can set a stop loss, which will automatically close your position should it move against you by a certain amount. If you place a take profit, this will automatically close out a winning position once it has moved in your favor by a particular amount. In this way, you can prevent unlimited wins and losses.
This is why the notion that binary options are superior because “your risk is fixed” is a bit misleading. You can technically fix your risk while doing spread betting or some other trading activity as well.
Best One? Binaries or Spread Betting
Which is better, financial spread betting or binary options? The real answer is it is up to you and your psychology. I like to say that binary options are simple, not easy. Simple to trade, but not easy to win.
Spread betting is more complicated. It is not as simple. It requires you to make more decisions about your trade because even a small trade can turn into a big trade if the price really starts moving. Which is better for you is the question you should ultimately be asking yourself.
Both present traders with relatively simple concepts to comprehend, so you shouldn’t have a problem learning either. As a trader, you have your own unique trading personality, and that may be a determining factor in whether you trade binary options or do spread betting instead. There are other factors too which may drive your decision, including deposit requirements, minimum and maximum trade sizes, and so on. Every broker (whether they offer binary options or spread betting) has unique rules for every aspect of trading, so it may also be a question of which broker is best for you. Do some research, test some trades, and figure out for yourself what type of trading you like to do—it may even be a combination.