According to Gordon Pape, writing in Forbes, this sort of thing can quickly become addictive...no one, no matter how knowledgeable, can consistently predict what a stock or commodity will do within a short time frame. 13In 2007, the Options Clearing Corporation proposed a rule change to allow binary options, 14 and the Securities and Exchange Commission approved listing cash-or-nothing binary options in 2008. 15 In May 2008, the American Stock Exchange (Amex) launched exchange-traded European cash-or-nothing binary options, and the Chicago Board Options Exchange (CBOE) followed in June 2008. The standardization of binary options allows them to be exchange-traded with continuous quotations.Amex offers binary options on some ETFs and a few highly liquid equities such as Citigroup and Google. Amex calls binary options Fixed Return Options (FROs) calls are named Finish High and puts are named Finish Low. To reduce the threat of market manipulation of single stocks, Amex FROs use a settlement index defined as a volume-weighted average of trades on the expiration day. Amex and Donato A. Montanaro submitted a patent application for exchange-listed binary options using a volume-weighted settlement index in 2005. 16CBOE offers binary options on the SampP 500 (SPX) and the CBOE Volatility Index (VIX). 17 The tickers for these are BSZ 18 and BVZ, respectively. 19 CBOE only offers calls, as binary put options are trivial to create synthetically from binary call options. BSZ strikes are at 5-point intervals and BVZ strikes are at 1-point intervals. The actual underlying to BSZ and BVZ are based on the opening prices of index basket members.A trader who thinks that the EUR/USD price will close at or above 1.2500 at 3:00160p.m. can buy a call option on that outcome. A trader who thinks that the EUR/USD price will close at or below 1.2500 at 3:00160p.m. can buy a put option or sell a call option contract.The risk involved in this trade is known. The traders gross profit/loss follows the all or nothing principle. He can lose all the money he invested, which in this case is 40 x 10 400, or make a gross profit of 100 x 10 1,000. If the EUR/USD price will close at or above 1.2500 at 3:00160p.m. the traders net profit will be the payoff at expiry minus the cost of the option: 1,000 400 600.The trader can also choose to liquidate (buy or sell in order to close) his position prior to expiration, at which point the option value is not guaranteed to be 100. The larger the gap between the spot price and the strike price, the value of the option decreases, as the option is less likely to expire in the money.In the BlackScholes model, the price of the option can be found by the formulas below. 21 In fact, the BlackScholes formula for the price of a vanilla call option (or put option) can be interpreted by decomposing a call option into an asset-or-nothing call option minus a cash-or-nothing call option, and similarly for a put the binary options are easier to analyze, and correspond to the two terms in the BlackScholes formula.If we denote by S the FOR/DOM exchange rate (i.e., 1 unit of foreign currency is worth S units of domestic currency) we can observe that paying out 1 unit of the domestic currency if the spot at maturity is above or below the strike is exactly like a cash-or nothing call and put respectively. Similarly, paying out 1 unit of the foreign currency if the spot at maturity is above or below the strike is exactly like an asset-or nothing call and put respectively. Hence if we now take , the foreign interest rate, , the domestic interest rate, and the rest as above, we get the following results.In the standard BlackScholes model, one can interpret the premium of the binary option in the risk-neutral world as the expected value probability of being in-the-money unit, discounted to the present value. The BlackScholes model relies on symmetry of distribution and ignores the skewness of the distribution of the asset. Market makers adjust for such skewness by, instead of using a single standard deviation for the underlying asset across all strikes, incorporating a variable one where volatility depends on strike price, thus incorporating the volatility skew into account. The skew matters because it affects the binary considerably more than the regular options.A binary call option is, at long expirations, similar to a tight call spread using two vanilla options. One can model the value of a binary cash-or-nothing option, C, at strike K, as an infinitessimally tight spread, where is a vanilla European call: 22 23Since this turn of events Markets World has been inundated with questions relating to our regulation and location. It is clear that there are many anxious binary option traders out there and whilst we are not located in the Eurozone we feel it important to give reassurance.Cyprus is considered by many to be the hub for all binary option platforms. Indeed some of the largest companies are located in Cyprus, from Banc de Binary through to SpotOption (a large software provider). These companies are regulated under Cypruss CySEC regulator.The reason for this choice was simple: we want to give our clients peace of mind that all funds and deposits are 100 safe as well as give reassurance that the financial foundations of Markets World were safe, secure and reliable. The Isle of Man provides this environment through our regulator, the GSC. We feel this is what sets Markets World apart from our competition.You may use these HTML tags and attributes:abbr acronym b blockquote cite cite code del datetime em i q cite s strike strongThe website marketsworld is owned and operated by Markets the World Limited pursuant to a current license issued by the GSC, Isle of Man, British Isles. No one under the age of 18 may register or trade via this site. All debts are fully enforceable according to Isle of Man law. Markets World, the logo and all related marks are trademarks of Markets World. All rights reserved.
