"In the blue corner: an Old Etonian with a tendency for gaffes who likes to call table tennis "wiff waff". In the red corner: London's favorite newt-fancier and self-confessed political nerd, vying to reclaim City Hall for the third time in 12 years".
That's how the Evening Standard sums up the latest race to be mayor of London. On 3 May we will know whether the winner will be the current mayor Boris Johnson or challenger Ken Livingstone. And for spread betters, there's a chance here to spice things up a bit via a binary bet on the outcome.
What are binary bets?
Anyone familiar with fixed-odds betting will get the hang of binary betting pretty fast. With a conventional spread bet, you go 'long' or 'short' on an event (anything from a share price move to the outcome of a football match) and face the possibility of near-unlimited profits or losses.
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Losses can be managed using stop losses, but that still leaves a big range of possible outcomes. With a binary bet on the other hand, your maximum gain or loss is known from the start. Let's turn back to the mayoral race to talk through an example.
Playing Ken versus Boris
At the time of writing, IG index is offering a spread of 77-81 on Boris to win. So let's say you think he will. You buy the bet at a price of 81 and decide on your stake. Let's say it's £10 per point (the minimum is £1). If Boris duly trashes Ken, you make (100-your bet) x £10. So (100-81) x £10, which is £190.
Now for the bad news. Should you lose the bet if Ken wins, you lose (your bet-zero) x £10, or £810. Ouch. The big gap between your potential profit and loss tells you that the spread betting community believes Boris will win comfortably.
A Ken fan could sell the same spread and make (77-zero) x £10 or £770 for being right if Ken wins and lose (100-77) x £10, or £230 for being wrong if Boris wins.
How the bookie makes money
You may have spotted a little twist here. If Boris wins, people who bet on that outcome make £190 at £10 per point. Yet anyone who bet on Ken to win loses £230. The difference of £40 represents a straight profit for IG index based on a £10 per point bet. That's how they make a tidy living from spread betters. The narrower the spread in a binary bet, the less they make.
So before you place a bet, especially on a highly liquid event like a currency or major index move, it's always worth contacting a few brokers to compare prices. And if you are brand new to binary betting, use your broker's website to learn more about it and don't be afraid to ask them to talk you through exactly how each bet works and how your profits and losses will be calculated. If their helpdesk won't do this for you (IG index are good at this in my experience) look elsewhere to trade.
Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.
He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.
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