Binary bets: a good alternative to spread bets

One of the novice spread better's biggest fears is losing money fast and not fully understanding why. And that's certainly possible if you jump in to pure spread betting without doing some serious homework first.

For the nervous better, or perhaps someone more used to the fixed-odds betting you see at the racecourse, there is an alternative product to the standard spread bet the binary bet.

It's a simple product. There are only two possible outcomes you either win a fixed amount, or you lose a fixed amount. Both are known up front.

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All binary bets are quoted in a range of 0-100. For example you might be quoted a price of 70-72 on the FTSE ending the day up on the previous close. There are only two outcomes it does, or it doesn't.

If you think it will end the day up, you could buy the spread at 72. Say the FTSE ends the day (the London Stock Exchange sets closing prices just after 4.30pm) at 5,300, having closed at 5,100 the previous night you win. The amount is 100-the level of your bet, in this case 72. So that's 28 pointstimes your agreed stake. If that was £10 per point then you win £280. And that's true whether the FTSE closes at 5,102 or 5,500 provided it's up overall.

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However, get the bet wrong and you lose 72-0, or 72 points at £10 per point. That's £720. Once the FTSE starts rising, and the closer you are to the market closing, the nearer to 100 points the bet will be priced for new gamblers.

In short, the later in the day you place a binary bet, the less you are likely to win as the closing level for the index becomes more and more predictable (barring a New York style sudden 'flash crash' of course!).