Play a bumpy market with binary bets

With the stock markets so volatile, you can be forgiven for not wanting to risk a punt. But with a binary bet, you can put a cap on your losses so you know exactly how much you're risking. Tim Bennett explains.

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First it fell fornine days in a row. Then it rose for three. Now it's falling again.

Yes, the FTSE 100 is pretty volatile right now even as it drifts steadily downwards on the back of almost unending bad news from the eurozone. For spread betters it can feel both difficult and risky to punt on its next move using a traditional spread bet. After all, get it wrong and you face big losses unless you spend money on a guaranteed stop.

So, as an alternative, why not limit your betting to a single day and also cap your downside using a binary bet.

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Let's say it's just before 4pm and the FTSE 100 is trading at 5,300 points having drifted down all day. You decide it will rally towards the end of the trading day it's only got around half an hour to go. You are offered a binary price of 20-24. You are right and the FTSE does move up to close at 5,305. Your bet size was £10 per point. Now what?

Well, with a binary bet your win is 100 24 points, which is 76, all times £10, so £760. Had you got it wrong you would have lost 20 points x £10 or £200. That's 20 points less zero (the minimum possible) x £10 (your bet size).

Note that to win, you only had to beright about the FTSE closing up. And even if it had closed up 100 points (unlikely but possible) your win is still £760 at £10 a point as all winning bets close at a price of 100 points.Equally had it plunged at the close you can't lose more than £200 as all losing bets close at a price of zero points.

Obviously as a beginner, it's better to start with a lower bet size most providers will let you drop it to as low as £1 per point while you learn the ropes. Also, do take advantage of any simulations provided by your broker before you trade for real.

Tim Bennett

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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