Spread Betting vs Binary Options
Some don’t recognise the differences between binary options and spread bets so this post is designed to list the stark contrast, especially the limited v unlimited risk aspect.
Spread betting vs binary options risk profile is quite different. Binary options have a lower risk profile as the loss that can be sustained by a trader in a trade is restricted to the amount that the trader invested into that trade. In other words, unless the invested amount is the last in the trader’s account, a trader cannot lose his account from just a single trade. In spread betting, the situation is different. If the market is to go against the trader in a super-volatile environment, the trader can actually lose his entire account if a stop loss is not used to control losses in this situation.
This is what makes binary options a fixed risk investment, as profit or loss is limited. On the other hand, spread betting is a variable risk investment, where profit and loss are not fixed to the invested amount, but rather to the degree of stop or profit setting that the trader implements.
Avenues of Profitability
Spread bets typically involve trades betting strictly on asset direction, which leads the trader to either go long or short, depending on if the asset ends higher or lower than market price. Binary options bets involve not only asset direction (Call/Put), but other asset behaviour such as trading in/out of a range, touching/not touching a particular price level (the strike), etc.
Binary options traders incur very little trade cost which is usually built into the cost of the trade; it is quite negligible. In contrast, traders who engage in spread betting have to pay the broker a spread on the bet that they are trading. The size of the spread increases with the trade investment amount, which can make this quite pricey.
Spread betting involves trading in assets that are outside the purview of the financial markets (e.g. sporting events such as horse racing) and this can make them quite complicated for the new trader. Binary options assets are restricted to those assets that are found on the financial markets, making this a straightforward and easier way for greenhorns to get market experience.
Entry into the binary options market does not cost much money. With just $100, a trader can open an account with a binary options broker. Furthermore, a trader can start trading binary options with as little as $5. This is possible as the binary options market is a zero margin investment vehicle. However, spread betting runs on margin and this requires that the trader must have a well-capitalized account to cater for the margin costs of the spread bets, effectively making it more costly to start trading spread bets.
Similarities between Spread Betting and Binary Options
Both spread betting and binary options provide payouts based on asset behavior. For spread bets, this is the up-down movement of an asset. For binary options, this also goes further to include other asset behavioural patterns.
Spread betting and binary options trading do not require the trader to own the asset being traded. They only require the trader to make predictions based on the asset behavior.
On a final note, spread betting and binary options are tax-free in many jurisdictions, so traders who are worried about the tax guys hunting them globally have nothing to fear when trading either of the two investment vehicles. Please note that this last point does not apply to US traders.