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Author: IlanBigfoot Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1206  
Subject: Re: What is a Binary Option or Digital Option Date: 9/22/2012 12:28 AM
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I guess it may seem that binary options are simpler. But the main problem is if what you are betting on isn't a binary (on/off) type of bet, then you lose it all if you are just slightly wrong, and you don't benefit additionally if you are really right.

So a real binary bet, like, will Obama or Romney win the election, there's only two possible results (barring freak extremes) so where Obama wins by one electoral vote or a landslide, doesn't matter to the bet.

But betting on what the value of Google will be, is on a sliding scale. A binary option might say, will it be above or below $735 on January 18, 2013 (it's now $734). But Google's value will slide around that mark with many possible results; it might be $735.01, or $800, or $600.

Someone today bet it will be above $735 by buying the traditional option call GOOG130119C00730000 and paying $38.20 for the bet. Now if they're wrong, they lose it all, but if they are right, then it matters how much. If Google goes to $800, they get $70. If Google goes to $900, they get $170. If Google goes to $1000, they get $270, etc. That's traditional options.

With binary, you might bet to receive $100 if Google will be above $730, and the privilege might cost you, I estimate, $58. (I don't know if this price actually is available, but keep reading.) If Google is $731, $800, $900, $1000, whatever, you get a flat $100.

Simpler, but limited.

You could accomplish nearly the same thing by buying traditional calls right below it and then selling calls at the price mark (This called a spread... I think?)


buy 730.00 GOOG130119C00730000 41.10
sell 735.00 GOOG130119C00735000 38.20

So to bet Google will be above $735 you'd buy for $41.10 and sell at $38.20, a difference of $2.90. If you are wrong and Google is much below $735, you'd likely lose everything. (Actually it slides between $5 and $0 at prices between $735 and $730: being slightly wrong might not hurt.) If you are right you would get the $5, and only $5. If Google shoots through the roof, you don't benefit by being really right. Paying $2.90 for a chance to win $5 would be about the same as paying $58 to win $100, that's where I'd guess the binary option market price to be.

Hope this is useful! Any criticism of my example is welcome.
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