Binary Options vs Spread Betting – What’s The Difference?


Binary options and spread betting are the most exotic forms of participation in the financial markets, blurring the lines between trading and gambling. Although they share similarities, they also have several considerable differences.

Differences Between Binary Options and Spread Betting:

Binary optionsSpread betting
LeverageN/AYes
Length of tradesShort-term, expiry-based (typically not longer than five minutes)More long-term with no expiry time
Risk-to-rewardFixed, lower payoutMuch higher payoff (but with more uncertainty)
Region popularityPracticed in more countriesMainly popular in the UK and Ireland
RegulationLess regulatedMore regulated

Is one easier than another? Is one better than another? Let’s dive in!

Good Things to Know About Binary Options vs Spread Betting

  • Nature of trades is different: Binary options are “all or nothing” propositions with fixed outcomes, while spread betting involves predicting whether the asset’s current value will be higher or lower than the bid price with no expiry time limit
  • Binary Options offers lower payouts but more certainty
  • Spread Betting offers potentially higher payouts but more uncertainty and risk
  • Spread Betting is often a form of betting used with sports games
  • No leverage involved with binary options, leverage involved with spread betting
  • Binary options are more popular globally, with spread betting more popular in the UK/Ireland

What Are Binary Options?

A binary option is an option with an ‘all or nothing’ preposition. It’s ‘binary’ because each trade will always have two outcomes with no in-betweens: a fixed monetary amount or nothing. Binary options have the same basic elements as standard options:

  • The underlying asset (e.g., a stock, a forex pair, a crypto pair, a commodity, etc.)
  • The direction (a ‘call’ refers to a bullish or buying position, while a ‘put’ refers to a bearish or selling position)
  • The strike price – the level that the speculator believes the underlying asset will be below or above by the expiry date.
  • The expiry date and time, which ranges from 10 seconds to 5 minutes in binary options on average

Traders receive a payout (on average, 70-90% of the amount risked) from the broker if the option expires ‘in the money.’ Alternatively, they incur a loss if the option expires ‘out of the money.’ Let’s cover a simple example.

Assume a trader believes the ‘XYZ’ stock price will be above $50 within five minutes (the expiry). So, they initiate a call option, risking $100 with an 80% payout ($80). If the price exceeded $50 before the expiry time, the trader would be ‘in the money’ and be credited $80. Meanwhile, they would lose $100 if the share price was below $50 before expiry.

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What Is Spread Betting?

Spread betting is a points-based, wager-like style of trading financial markets. The purpose is to predict whether the asset’s current value will be higher than the bid price or lower than the asking price.

The difference between the bid and ask prices is known as the spread. Yet, traders aren’t technically trading the spread in spread betting. Spread bettors bet on the price’s upward and downward movements. 

The concept of financial spread betting comes from sports bookmakers in the 70s who began betting on markets like indices.

Here are the aspects involved in a spread betting trade:

  • The underlying asset (e.g., a stock, a forex pair, a crypto pair, a commodity, etc.)
  • The direction (going ‘long’ refers to buying, while going ‘short’ refers to selling)
  • The bid or ask price
  • The bet size (this is a certain number of points depending on the underlying asset. The point represents a pound, penny, or even one-hundredth of a penny).

Another crucial element with spread betting is the use of margin or leverage. This means traders can open a much larger position than their initial capital would normally allow. As the cliché, leverage is a double-edged sword, meaning that losses and profits are magnified equally.

The margin rates vary depending on the traded asset and broker. Yet, we express the margin as a percentage of a position’s total value. Let’s use a forex pair for our example. Assume EUR/USD is trading for 1100.0 with a 5% margin rate.

The total value for this market would be £11,000 without leverage, which is how much you would need to have in your account. Yet, a 5% margin rate means the trader can trade this pair with only £550 (5 X 11000 / 100) as their balance.

While the profit potential is higher in such an instance, the losses would be calculated on the full position size (£11,000) rather than the margin (£550).

Let’s illustrate a spread bet with a simple example to understand this way of speculating in traded assets. Consider the parameters discussed: EUR/USD is worth 1.1000; the trader’s balance is £750. 

Assume that the broker used a one-pound-per-point system for the price movements. Let’s say the pair moved from 1100.0 to 1100.50 (a 50-point difference). The trader would have a floating profit of £50 if they bought this pair. Alternatively, if the euro dropped 20 points from 1100.0 to 1099.80, the floating loss is £20.

Example of Spread Betting:

  • Leveraged trading
  • Earn more profit if the price moves in your direction
  • Long-term time limits
  • No limited profit

Example of Binary Options:

  • No leverage
  • Fixed expiry time (long- and short-term)
  • Limited profit
  • Limited risk
  • You only need 1 point movement to win the trade
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The Main Differences Between Binary Options and Spread Betting

Binary options and spread betting share the similarity of being derivatives. This means that the prices that traders speculate on are based on or derived from actual markets like forex, commodities, stocks, indices, etc. A derivative also means that traders have no physical connection or ownership of the asset as it’s online-based.

Also, each market requires an above-average predictive ability to forecast the extent of price movements over a certain period.

Otherwise, several notable distinctions exist when comparing binary options and spread betting.

Leverage

The first major difference is that binary options aren’t leveraged, while spread betting is. Thus, the magnitude of funds lost in the former is much lower. Given these options’ capped, time-based nature, traders always stay within their bet amount regardless of the market conditions. 

Meanwhile, even with stop losses in spread betting, traders can lose much more than they intended. As the holding period is theoretically unlimited, not closing your position in time or using a stop loss can lead to a ‘margin call,’ in which you risk losing the entire account.

This is the greatest danger of any leveraged market, particularly if the trader has used less without proper position sizing and risk management.

It’s also worth mentioning that spread betting typically uses two kinds of margins: a deposit margin and a maintenance margin. The first is the initial funding, while the other is additional funds in scenarios where the trader incurs high floating losses (when a margin call is likely).

Length of Trades

Modern binary options have quick expiry times, whereas this doesn’t exist. Hence, the former is best suited for short-term trading. Meanwhile, spread betting accommodates a wider range as there are no limits over how long you can maintain a trade (provided you aren’t in a margin call).

Risk-to-reward

Spread betting offers a much higher payout than binary options since there are no expiry times. Holding a position indefinitely gives a greater chance of profiting more without extra effort.

Meanwhile, the payout is capped with binary options. Moreover, it doesn’t provide the most favorable expectancy and often lowers the 1:1 ratio. Binary options traders must win more positions to compensate for their losses. Although other binary options can pay more, these come with complex requirements.

On the other hand, this creates much uncertainty despite the higher payout potential of spread betting. Meanwhile, the payoff is more certain with binary options, even if it’s lower.

Region Popularity

While spread betting has existed for many decades, it’s less popular globally than binary options. The United Kingdom (UK) and Ireland are the main regions that offer and promote spread betting.

Meanwhile, binary options have found favor in more countries. Yet, they are banned in several nations, given their associations with gambling.

Regulation

The fact that spread betting is only popular in two regions makes it easier to regulate. The Financial Conduct Authority (FCA) and the Central Bank of Ireland are trusted, reputable regulators that oversee financial services in the UK and Ireland, respectively.

Thus, traders can invest safely with brokers that offer this kind of trading. On the other hand, binary options are often unregulated or have little regulation, making them riskier than their counterpart.

Conclusion: Which Is Better, Binary Options or Spread Betting?

Like any other comparison, it’s different strokes for different folks. Many argue binary options are easier than spread betting given simple dual outcomes.

It’s also more short-term-based and suits traders who prefer to trade frequently. Meanwhile, spread betting can be short and long-term-based, with a much better expectancy (assuming a proven trading strategy).

The capital requirements for spread betting are much less due to leverage, but this can lead to larger losses than you wouldn’t incur with its counterpart.

Binary options and spread betting are equally challenging trading methods in the complex world of financial markets. Investors must consider their preferred option while managing the risks associated with each.

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Most Asked Questions:

Which is more profitable: binary options or spread betting?

Spread betting is generally more lucrative as there are no fixed payouts and limits to how long traders can hold their positions.

Can you trade binary options and spread bets at the same time?

Yes, this would be across two different brokers. Each trading form will require a high level of proficiency.

Are binary options and spread betting gambling?

Analysts often consider either of the two as a form of gambling. They are even regulated as such instead of financial or trading investments. Although both trading forms resemble gambling, they are not exactly.

Are binary options and spread betting illegal?

Many countries have restricted binary options and/or spread betting. So, it’s worth checking your country’s laws before you trade either.

About the author

Marc Van Sittert
Marc Van Sittert is an experienced Binary Options Trader and coach who is originally from South Africa. He started his career in 2014 by trading old-school Binary Options online. His main focus is on short-term contracts with 60-second trades.

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