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Binaries and fixed odds offer a watertight means of weathering the current volatility. Nick Sudbury battens down the hatches

The markets have been extremely volatile of late with large moves often followed by sharp reversals. These sorts of choppy conditions can be treacherous to trade as positions can easily be stopped out early. One way round the problem is to switch to binaries and fixed odds. The advantage of these products over something like a spread bet is that the maximum loss can never exceed the initial stake. This means that even after an early adverse move it is perfectly safe to let them run to expiry in the hope that they will come back into profit.

‘The Time-Switches have been very popular recently,’ says Ryan Kneale, a market analyst at the firm. ‘They are excellent for allowing people to back a directional view of the market when conditions are choppy. An example would be a bet to win £100 every day that the FTSE finishes below 6,000 for the next ten days. Each win is locked in at the end of the relevant time interval and paid out when the bet expires.’

Someone who thought that the FTSE had entered a medium-term downtrend but would continue to experience a high degree of volatility could design a Time-Switch to reflect their view. For example, with the index trading at 5,767, they could say that they wanted to win £50 for each of the next eight days that the FTSE finishes below 5,717. This bet was recently priced at £167, which in terms of the odds would have made it equivalent to a binary costing 42 points. The maximum win was £400.

Short-term trades

Another means of avoiding the worst of the choppy conditions is to concentrate purely on the short-term outlook. One way of doing this would be to use the new Flash Bets from BetOnMarkets.com. These allow clients to take an ultra short-term view on whether a particular currency or UK blue chip will rise or fall over the next few minutes. The company is also currently looking at the possibility of adding indices to this list.

‘People like the Flash Bets because they are quick, there is no spread and they only have to be right by one point to win,’ says Michael Wright, a director at BetOnMarkets.com. ‘One way that clients have been using them is to trade the major economic announcements and some people are able to consistently get them right.’

Reversals

The all-or-nothing nature of a binary can have the effect of magnifying relatively small changes in the underlying price into significant price movements. This is particularly the case when a market moves strongly in one direction and then begins to reverse.

‘We have seen lots of instances where big early moves in the markets have reversed later in the day and in these sorts of conditions the up/down binaries really come into their own,’ says Tim Hughes, head of sales trading at IG Index. ‘A year ago an early fall of 50 points on the FTSE would have meant the daily up/down bet would have been a done deal, but now there is a much bigger chance that it will reverse before the close.’

The up/down binaries from IG Index and its sister company BinaryBet.com are pre-defined bets that can either be bought and sold prior to the open, or traded in running using the current real-time price. People can choose how much they want to risk per point and as each bet closes at either 0 or 100 they will know exactly how much they stand to win or lose. Positions can also be closed early to take profits or limit a loss.

Locking in the gains

One option that has proved popular and highly profitable in recent weeks has been the Lookback Bet available from BetsForTraders.com. This pays the difference between the strike price and the best price that the market reaches over the life of the bet, multiplied by the trader’s chosen value per point.

With the FTSE trading at 5,764, someone who thought that the index would bounce back strongly at some point over the next few days could use a Lookback to try and capitalise. For example, they could stipulate that they wanted to win £1 for each point that the market rose above 5856 in the next 15 trading days. This bet would have cost £176 but would have paid out every point that the index went above the stipulated strike price during the life of the trade.

‘A Lookback is a play on volatility,’ says Kneale. ‘They cost more than the other types of bets, but offer the big advantage of locking in the best price during the term of the exposure. Clients have been winning a lot of money on them recently.’

A golden opportunity

The most popular binary and fixed odds bets are those that relate to indices and currencies, but there is also a growing level of interest in the commodity markets. Many of these have been experiencing a protracted bull run, with one of the strongest performers in recent months being the price of gold.

‘Normally gold and the US dollar have an inverse relationship, but both have been increasing of late,’ says Wright. ‘Gold has been in a strong uptrend for the last three years or so and generally our clients have been going long using bets of typically two – three month durations.’

There are lots of ways of trading gold at BetOnMarkets.com. For example, the expiry bets allow someone to back the precious metal finishing inside or outside of a given range, or simply above or below a particular price. There are also boundary bets like the One Touch that pay out as long as it hits a certain level at some point during the duration of the exposure.