Calculating Profits and Losses in Binary Betting
One of the key advantages of binary betting as a trading style is the ability to calculate your potential earnings and losses from a given transaction. Unlike many forms of trading, where the extent of a win is significantly dependent on the degree to which you’ve made the right call, binary betting moves on either a win or a loss – with settlement at a guaranteed level of either 0 or 100, it becomes simple to put a figure on your total liability or potential upside gain.
Binary bets are quotes on spreads, similar to spread betting, between 0 and 100. The closer these spreads are to 100, the more likely an event is to occur – for example, if the FTSE is quoted at 89-94, it is thought very likely that the market will rise that day, with a maximum upside of just 6 times your stake. However, odds of 15-21 make an event unlikely in the eyes of the broker quoting the spreads, leaving a large scope for earnings on the upside.
Calculating earnings and losses in binary betting is an easy process. Here’s an example to illustrate the necessary calculation.
Suppose you bet on oil prices to rise, at spreads of 63-68, therefore buying at 68 at £10 per point. If your position loses on the day, you’re down £680 (68 x £10) – no more, no less. If your position wins, either by a 1 point market movement or a 10,000 point movement, your bet is settled at 100 – thus, 100-68 = 32, 32×10 = £320 profit. Note that the broker’s commission is already factored in, as the width between the 63 and 68, so £320 is your take home profit from the transaction.
Thus, the formula for calculating earnings with binary bets can be broken down as follows:
Winnings = (100 – buy rate) x stake
Likewise, for calculating losses, the formula can be express as:
Losses = Buy rate x stake
Of course, these formulae are reversed for short positions, i.e. if you ‘sell’ the market rather than ‘buy’. Nonetheless, the calculus of profit and loss with binary betting is arguably one of the most straightforward in investing, thanks to its fixed odds nature.