The Benefits Of Exchange Traded Binary Options - Sponsored by Nadex. You may have heard the term binary option before. This term may have a negative connotation for you or perhaps it has a very favorable one. Or, maybe it elicits no feelings what-so-ever. The truth is, there is a great deal of confusion surrounding binary options. They can be a fantastic trading instrument as long as they are structured correctly and traded on a regulated exchange. This article is going to explore exchange traded binary options and how they differ from those typically offered off-exchange or OTC, often by firms outside of the U. S. While all binary option contracts share the same name, there are many different flavors available. As a rule, all binary options share one characteristic. That is, at expiration there are only two potential outcomes, all or nothing. Hence the term binary option. For many of the instruments sharing this name though, that is where the similarities start and end. If on hearing the term binary option, you had a negative feeling, it is likely you had heard of, or perhaps even traded binary options as offered, by unregulated, or very lightly regulated, off-shore firms.
Over the last several years, the number of said firms significantly increased offering “an easy way to get massive returns from a small investment”. This is truly a case of if it sounds too good to be true, it is. As a result of the activities and conduct of said offshore firms, in June of 2013, the CFTC and SEC issued a joint fraud advisory alerting investors to the number of complaints they had received. Thankfully in this advisory they also explained to investors what to look for in legitimate firms offering binary options. Unfortunately, much of the confusion continues to this day. The full release of the CFTC Advisory can be found here: CFTC Fraud Advisory on Binary Options. In the CFTC Fraud Advisory note, Nadex (North American Derivatives Exchange) was listed alongside the CME as one of three exchanges to legally list binary options in the US and that any other entities outside of the three mentioned, who were offering binary options that are commodity transactions, are doing so illegally. Ultimately, binary options are a very serious trading vehicle which allow traders, or those interested in trading, a means to participate across a range of markets, while having absolute control over their risk exposure. It is important though for individuals interested in participating to understand what to look for in a firm, why to look for it and what the benefits of doing your homework are. Below is a short list of the benefits of trading binary options on a U. S. Regulated Exchange. U. S. Exchanges are regulated by government agencies dedicated to protecting traders and investors.
As part of this protection, they hold the exchanges to extremely high standards in every area of their operation. Two of the agencies responsible for maintaining a fair marketplace are the SEC which has oversight of a securities exchange like the CBOE and the CFTC which has oversight of Nadex. As part of the regulatory structure, exchanges that hold member funds, have strict requirements as to how this money may be handled. This generally means that funds are held in segregated accounts with top-tier financial institutions. Additionally, when members wish to withdraw funds, the exchanges must provide an easy to understand and fast withdrawal process. One of the main benefits of trading binary options on exchange is that the markets are transparent. Because the pricing of these contracts is derived from and settled against a 3 rd party market, traders have complete price discovery and transparency. Also, if a trader has a question regarding a settlement, the exchange will provide time and sales data for verification. An exchange’s most basic function is to match buyers and sellers in an unbiased manor. To maintain a bias free environment, the exchange itself, nor its employees may take positions in its markets. Also, unlike some OTC firms which may take the other side of your trade, exchanges do not make prices or take the other side of your trade.
You are never “betting against the house”. If you ever played a game with an older sibling in which as soon as you started doing well, they changed the rules to put you back at a disadvantage, you probably understand the importance of having clear, well defined rules that cannot be changed mid-stream. And how much more important is that when your money is on the line? As part of the governance, exchanges must publish publicly well established, clearly defined rules. Any rules that do change need to be approved by the regulatory authority and members must be notified of the rule change prior to it taking effect. Not so with some of the offshore firms. There are many different uses for binary options and I would encourage anyone interested in exploring them to do so. As with trading any instrument though, you need to understand not just the contract and corresponding risks, but know the firm with which you are trading. To learn more about exchange traded binary options, visit Nadex. com. Futures, options and swaps trading involves risk and may not be appropriate for all investors.
Binary options exchange keywords Binary Options, also known as Digital Options, all-or-nothing options or Fixed Return Options (FROs) have been available throughout worldwide markets for many years. In 2008, the United States introduced binary options trading to the traders’ portfolio of financial tools. In 2012, they were officially deemed financial instruments by the Cyprus Securitues and Exchange Commission ( ) which would regulate and provide licenses for compliant brokerages. A Binary Option is in essence nothing more than a prediction of which way the price of a stock, commodity, index or currency will move by a designated expiry time. With Binary Options, a trader never purchases or owns the asset – he is only predicting the direction that the asset will go. There are only two possible outcomes, up or down, and the price of the asset does not matter. For example, if the price of gold is currently 1500, will it rise or fall by 5:00 PM today? As far as a trader is concerned, all that matters is if his prediction was correct or incorrect. Binary Options are the simplest way to trade on the market. 319 28th OKtomvriou St, 8th floor. NEW TRADING PLATFORM. NEW TRADING PLATFORM. Enter your login email below and fill the security check.
We will send you an email with a link to reset your password. CFTC Fraud Advisories. The Commodity Futures Trading CommissionЂ™s (CFTC) Office of Consumer Outreach and the Securities & Exchange CommissionЂ™s Office of Investor Education and Advocacy are issuing this Investor Alert to warn about fraudulent schemes involving binary options and their trading platforms. These schemes allegedly include refusing to credit customer accounts, denying fund reimbursement, identity theft, and manipulation of software to generate losing trades. Binary options differ from more conventional options in significant ways. A binary option is a type of options contract in which the payout will depend entirely on the outcome of a yesno proposition. The yesno proposition typically relates to whether the price of a particular asset that underlies the binary option will rise above or fall below a specified amount. For example, the yesno proposition connected to the binary option might be something as straightforward as whether the stock price of XYZ company will be above $9.36 per share at 2:30 pm on a particular day, or whether the price of silver will be above $33.40 per ounce at 11:17 am on a particular day. Once the option holder acquires a binary option, there is no further decision for the holder to make as to whether or not to exercise the binary option because binary options exercise automatically. Unlike other types of options, a binary option does not give the holder the right to purchase or sell the underlying asset. When the binary option expires, the option holder will receive either a pre-determined amount of cash or nothing at all. Given the all-or-nothing payout structure, binary options are sometimes referred to as Ђњall-or-nothing optionsЂќ or Ђњfixed-return options. Ђќ. Binary Options Trading Platforms. Some binary options are listed on registered exchanges or traded on a designated contract market that are subject to oversight by United States regulators such as the CFTC or SEC, respectively, but this is only a portion of the binary options market.
Much of the binary options market operates through Internet - based trading platforms that are not necessarily complying with applicable U. S. regulatory requirements. The number of Internet-based trading platforms that offer the opportunity to purchase and trade binary options has surged in recent years. The increase in the number of these platforms has resulted in an increase in the number of complaints about fraudulent promotion schemes involving binary options trading platforms. Typically, a binary options Internet-based trading platform will ask a customer to deposit a sum of money to buy a binary option call or put contract. For example, a customer may be asked to pay $50 for a binary option contract that promises a 50% return if the stock price of XYZ Company is above $5 per share when the option expires. If the outcome of the yesno proposition (in this case, that the share price of XYZ Company will be above $5 per share at the specified time) is satisfied and the customer is entitled to receive the promised return, the binary option is said to expire Ђњin the money. Ђќ If, however, the outcome of the yesno proposition is not satisfied, the binary option is said to expire Ђњout of the money, Ђќ and the customer may lose the entire deposited sum. There are variations of binary option contracts in which a binary option that expires out of the money may entitle the customer to receive a refund of some small portion of the depositЂ”for example, 5%Ђ”but that is not typically the case. In fact, some binary options Internet-based trading platforms may overstate the average return on investment by advertising a higher average return on investment than a customer should expect given the payout structure. For instance, in the example above, assuming a 5050 chance of winning, the payout structure has been designed in such a way that the expected return on investment is actually negative , resulting in a net loss to the customer. This is because the consequence if the option expires out of the money (approximately a 100% loss) significantly outweighs the payout if the option expires in the money (approximately a 50% gain). In other words, in the example above, an investor could expect, on average, to lose money. Investor Complaints Relating to Fraudulent Binary Options Trading Platforms. The CFTC and SEC have received numerous complaints of fraud associated with websites that offer an opportunity to buy or trade binary options through Internet-based trading platforms.
The complaints fall into at least three categories: refusal to credit customer accounts or reimburse funds to customers identity theft and manipulation of software to generate losing trades. The first category of alleged fraud involves the refusal of certain Internet-based binary options trading platforms to credit customer accounts or reimburse funds after accepting customer money. These complaints typically involve customers who have deposited money into their binary options trading account and who are then encouraged by ЂњbrokersЂќ over the telephone to deposit additional funds into the customer account. When customers later attempt to withdraw their original deposit or the return they have been promised, the trading platforms allegedly cancel customersЂ™ withdrawal requests, refuse to credit their accounts, or ignore their telephone calls and emails. The second category of alleged fraud involves identity theft. For example, some complaints allege that certain Internet-based binary options trading platforms may be collecting customer information such as credit card and driverЂ™s license data for unspecified uses. If a binary options Internet-based trading platform requests photocopies of your credit card, driverЂ™s license, or other personal data, do not provide the information. The third category of alleged fraud involves the manipulation of the binary options trading software to generate losing trades. These complaints allege that the Internet-based binary options trading platforms manipulate the trading software to distort binary options prices and payouts. For example, when a customerЂ™s trade is Ђњwinning, Ђќ the countdown to expiration is extended arbitrarily until the trade becomes a loss. Unregistered Transactions, Operations, Broker-Dealers, or Trading Exchanges Illegal Options Transactions.
In addition to ongoing fraudulent activity, many binary options trading platforms may be operating in violation of other applicable laws and regulations, including certain registration and regulatory requirements of the CFTC and SEC, as described below. Certain Registration and Regulatory Requirements of the SEC. For example, some binary options may be securities. Under the federal securities laws, a company may not lawfully offer or sell securities unless the offer and sale have been registered with the SEC or an exemption from such registration applies. For example, if the terms of a binary option contract provide for a specified return based on the price of a companyЂ™s securities, the binary option contract is a security and may not be offered or sold without registration, unless an exemption from registration is available. If there is no registration or exemption, then the offer or sale of the binary option to you would be illegal. If any of the products offered by binary options trading platforms are security-based swaps, additional requirements will apply. In addition, some binary options trading platforms may be operating as unregistered broker-dealers . A person who engages in the business of effecting securities transactions for the accounts of others in the U. S. generally must register with the SEC as a broker-dealer. If a binary options trading platform is offering to buy or sell securities, effecting transactions in securities, andor receiving transaction-based compensation (such as commissions), it likely should be registered with the SEC. to determine whether a particular trading platform is registered with the SEC as a broker-dealer, visit FINRAЂ™s BrokerCheck . Some binary options trading platforms may also be operating as unregistered securities exchanges . This would be the case if they matched orders in securities of multiple buyers and sellers using established non - discretionary methods.
However, there are cases where a registered broker-dealer with a trading system or platform may legitimately have no obligation to register as an exchange. Certain Registration and Regulatory Requirements of the CFTC. It is illegal for entities to solicit, accept offers, offer to or enter into commodity options transactions (for example, foreign currencies, metals such as gold and silver, and agricultural products such as wheat or corn) with U. S. citizens, unless those options transactions are conducted on a designated contract market, an exempt board of trade, or a bona fide foreign board of trade, or are conducted with U. S. customers who have a net worth that exceeds $5 million. To see the most recent list of exchanges that are designated as contract markets, check the CFTC website . There currently are only three designated contract markets offering binary options in the U. S.: Cantor Exchange LP Chicago Mercantile Exchange, Inc. and the North American Derivatives Exchange, Inc. All other entities offering binary options that are commodity options transactions are doing so illegally. Further entities that solicit or accept orders for commodity options transactions and accept, among other things, money to margin, guarantee, or secure the commodity options transactions must register as a Futures Commission Merchant. Entities that act as the counterparty (that is, they take the other side of the transaction from the customer as opposed to matching orders) for foreign currency options transactions for customers with a net worth of less than $5 million must register as a Retail Foreign Exchange Dealer. Because of their lack of compliance with applicable laws, if you purchase binary options offered by persons or entities that are not registered with or subject to the oversight of a U. S. regulator, you may not have the full benefit of the safeguards of the federal securities and commodities laws that have been put in place to protect investors, as some safeguards and remedies are available only in the context of registered offerings. In addition, individual investors may not be able to pursue, on their own, some remedies that are available for unregistered offerings. Ђў RememberЂ”much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U. S. regulatory requirements and may be engaging in illegal activity. Ђў Do not invest in something that you do not understand. If you cannot explain the investment opportunity in a few words and in an understandable way, you may need to reconsider the potential investment.
Ђў Before investing in binary options, you should take the following precautions : 1. Check to see if the binary options trading platform has registered the offer and sale of the product with the SEC. Registration provides investors access to key information about the terms of the product being offered. You can use EDGAR to determine whether an issuer has registered the offer and sale of a particular product with the SEC. 2. Check to see if the binary options trading platform itself is registered as an exchange. To determine whether the platform is registered as an exchange, you can check the SECЂ™s website regarding Exchanges . 3. Check to see if the binary options trading platform is a designated contract market. To determine whether an entity is a designated contract market, you can check the CFTCЂ™s website . Ђў Finally, before investing, use FINRAЂ™s BrokerCheck and the National Futures AssociationЂ™s Background Affiliation Status Information Center (BASIC) to check the registration status and background of any firm or financial professional that you are considering. If you cannot verify that they are registered, donЂ™t trade with them, donЂ™t give them any money, and donЂ™t share your personal information with them. Binary Options Exchange.
BinaryEX was started in December of 2012 to help traders and investors find a good binary options broker. Although brokers began offering binary options in 2011, binary options trading is still a new concept to many investors. A binary option gives the trader a potential profit of between 60% and 100% in just a few minutes. As you browse our website you will find information about binary option brokers, method, trading signals and auto trading robots. According to our research, there are almost 300 brokers offering binary options for trading. The first thing to do before opening a trading account, is to learn the difference between regulated brokers and binary option scams. Some binary option brokers offer demo accounts for new traders to to get a feel for their platform. Traders can really experience the effects that different option time frames have on profits or losses. Traders use a variety of trading signals and strategies to maximize profits in binary options trading. The typical method used by binary traders is technical analysis or momentum based strategies. Forex traders are usually the most successful binary option traders, as their trading style is very similar and easily adaptable for binary option trading. Visit our signal reviews to learn more. In the education section of our site, you will find many articles on the basics of binary option trading, trading strategies and information about taxes on binary option trading profits. Spending a few minutes educating yourself now, will greatly increase your odds of becoming a success trader.
Regulation of Binary Option Brokers. Less than 10% of brokers are actually licensed and regulated by . Most binary option brokers are based in offshore countries like Marshall Islands, Vanuatu, Seychelles, Bulgaria or Belize, however the recent MiFID regulations in the European Union, has allowed brokers to receive European Union approved licenses. Visit the Cyprus Securities and Exchange Commission () here. The CFTC in America has given licensed to two binary options exchanges Cantor Exchange & Nadex. Australia licenses binary option brokers via the ASIC. HighLow is a broker who is licensed by ASIC, see here. 2014 was a turning point year for the binary option industry. There are now more than 20 binary option brokers that have received a license from , ASIC, HCMC, BaFIN, , , & FSB. Continue reading about regulated option brokers. Taxes on Binary Options Trading. As we approach the fourth quarter of 2013, organized traders start planning for their year end tax planning. The year 2013 saw a fundamental change in regards to the tax treatment of binary option profits. Read More… Regulated Binary Option Brokers.
Regulated, licensed, authorized or accredited, call it what you want, but change is happening in the binary option brokers industry! Currently, more than twenty binary option brokers are regulated by&hellip Read More… Binary Options Demo Account. Demo Accounts are an Important Part of Choosing a Binary Options Broker. Many Brokers For Some Reason do not Offer Demo Accounts. Compare Binary Option Demo Accounts Read More… How Brokers Make Money. It is no secret, but it is often misunderstood, How a Binary Options Broker Makes Money. The simple answer is, when a trader loses money, the broker keeps it. And&hellip Read More… Is Binary Option Trading Gambling? The question has been asked many times about binary option trading, is it gambling or investing? The answer is quite simple. It all depends on you! Comparing Trading to Gambling&hellip Read More… New Broker Complaints Procedure. The leading regulator of binary option brokers, has recently changed their complaints procedure. We noticed at the beginning of 2016, investors are no longer able to submit a complaint directly&hellip Read More… Withdrawal Problems From Binary Option Brokers. When a trader first starts researching the binary options broker they are interested in using, they do a Google search for “xyz broker review”.
Depending on how long the broker&hellip Read More… How To Compare Binary Option Brokers. We will be discussing the key features that a binary options trader needs to analyze when they compare binary options brokers. Items to Compare are: Licensed or Unlicensed Trading Platform&hellip Read More… Binary Options Exchange - Copyright © 2013 - 2017 Providing Investors With The Latest Information About Online Brokers. About Us. We are not registered brokers or financial advisers and we are not licensed to give stock or financial advice. We take no responsibility for any losses you may or do incur. Trading Binary Options are extremely risky. Never invest money that you can not afford to lose. Most traders of binary options lose money. Trading in stocks, options, Forex, commodities, binary options, and other financial instruments can result in financial losses. Before placing any trade, make sure you understand your risks. Content on this site is for informational purposes only and should not be construed as professional financial advice. Be sure to thoroughly research the broker you choose. Rates and offers shown here may change without notice.
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The answer is quite simple. It all depends on you! Comparing Trading to Gambling&hellip Read More… New Broker Complaints Procedure. The leading regulator of binary option brokers, has recently changed their complaints procedure. We noticed at the beginning of 2016, investors are no longer able to submit a complaint directly&hellip Read More… Withdrawal Problems From Binary Option Brokers. When a trader first starts researching the binary options broker they are interested in using, they do a Google search for “xyz broker review”. Depending on how long the broker&hellip Read More… How To Compare Binary Option Brokers. We will be discussing the key features that a binary options trader needs to analyze when they compare binary options brokers. Items to Compare are: Licensed or Unlicensed Trading Platform&hellip Read More… Binary Options Exchange - Copyright © 2013 - 2017 Providing Investors With The Latest Information About Online Brokers. What You Need To Know About Binary Options Outside the U. S. Binary options are a simple way to trade price fluctuations in multiple global markets, but a trader needs to understand the risks and rewards of these often-misunderstood instruments. Binary options are different from traditional options. If traded, one will find these options have different payouts, fees and risks, not to mention an entirely different liquidity structure and investment process.
( For related reading, see: A Guide To Trading Binary Options In The U. S. ) Binary options traded outside the U. S. are also typically structured differently than binaries available on U. S. exchanges. When considering speculating or hedging, binary options are an alternative, but only if the trader fully understands the two potential outcomes of these exotic options. In June 2013, the U. S. Securities and Exchange Commission warned investors about the potential risks of investing in binary options and charged a Cyprus-based company with selling them illegally to U. S. investors. What Are Binary Options? Binary options are classed as exotic options, yet binaries are extremely simple to use and understand functionally. The most common binary option is a "high-low" option. Providing access to stocks, indices, commodities and foreign exchange, a high-low binary option is also called a fixed-return option. This is because the option has an expiry datetime and also what is called a strike price. If a trader wagers correctly on the market's direction and the price at the time of expiry is on the correct side of the strike price, the trader is paid a fixed return regardless of how much the instrument moved. A trader who wagers incorrectly on the market's direction loses herhis investment. If a trader believes the market is rising, shehe would purchase a call.
If the trader believes the market is falling, shehe would buy a put. For a call to make money, the price must be above the strike price at the expiry time. For a put to make money, the price must be below the strike price at the expiry time. The strike price, expiry, payout and risk are all disclosed at the trade's outset. For most high-low binary options outside the U. S., the strike price is the current price or rate of the underlying financial product, such as the S&P 500 index, EURUSD currency pair or a particular stock. Therefore, the trader is wagering whether the future price at expiry will be higher or lower than the current price. (For more, see What is the history of binary options? ) Foreign Versus U. S. Binary Options. Binary options outside the U. S. typically have a fixed payout and risk, and are offered by individual brokers, not on an exchange. These brokers make their money from the percentage discrepancy between what they pay out on winning trades and what they collect from losing trades. While there are exceptions, these binary options are meant to be held until expiry in an "all or nothing" payout structure.
Most foreign binary options brokers are not legally allowed to solicit U. S. residents for trading purposes, unless that broker is registered with a U. S. regulatory body such as the SEC or Commodities Futures Trading Commission. Starting in 2008, some options exchanges such as the Chicago Board Options Exchange (CBOE) began listing binary options for U. S. residents. The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Nadex is also a binary options exchange in the U. S., subject to oversight by the CFTC. These options can be traded at any time at a rate based on market forces. The rate fluctuates between one and 100 based on the probability of an option finishing in or out of the money. At all times there is full transparency, so a trader can exit with the profit or loss they see on their screen in each moment. They can also enter at any time as the rate fluctuates, thus being able to make trades based on varying risk-to-reward scenarios. The maximum gain and loss is still known if the trader decides to hold until expiry. Since these options trade through an exchange, each trade requires a willing buyer and seller. The exchanges make money from an exchange fee – to match buyers and sellers – and not from a binary options trade loser. High-Low Binary Option Example. Assume your analysis indicates that the S&P 500 is going to rally for the rest of the afternoon, although you're not sure by how much. You decide to buy a (binary) call option on the S&P 500 index.
Suppose the index is currently at 1,800, so by buying a call option you're wagering the price at expiry will be above 1,800. Since binary options are available on all sorts of time frames – from minutes to months away – you choose an expiry time (or date) that aligns with your analysis. You choose an option with an 1,800 strike price that expires 30 minutes from now. The option pays you 70% if the S&P 500 is above 1,800 at expiry (30 minutes from now) if the S&P 500 is below 1,800 in 30 minutes, you'll lose your investment. You can invest almost any amount, although this will vary from broker to broker. Often there is a minimum such as $10 and a maximum such as $10,000 (check with the broker for specific investment amounts). Continuing with the example, you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiry determines whether you make or lose money. The price at expiry may be the last quoted price, or the (bid+ask)2. Each broker specifies their own expiry price rules. In this case, assume the last quote on the S&P 500 before expiry was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. Had the price finished below 1,800, you would lose your $100 investment. If the price had expired exactly on the strike price, it is common for the trader to receive herhis money back with no profit or loss, although each broker may have different rules as it is an over-the-counter (OTC) market. The broker transfers profits and losses into and out of the trader's account automatically.
Other Types of Binary Options. The example above is for a typical high-low binary option – the most common type of binary option – outside the U. S. International brokers will typically offer several other types of binaries as well. These include "one touch" binary options, where the price only needs to touch a specified target level once before expiry for the trader to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before expiry. A "range" binary option allows traders to select a price range the asset will trade within until expiry. If the price stays within the range selected, a payout is received. If the price moves out of the specified range, then the investment is lost. As competition in the binary options space ramps up, brokers are offering more and more binary option products. While the structure of the product may change, risk and reward is always known at the trade's outset. Binary option innovation has led to options that offer 50% to 500% fixed payouts.
This allows traders to potentially make more on a trade than they lose - a better reward:risk ratio – though if an option is offering a 500% payout, it is likely structured in such a way that the probability of winning that payout is quite low. Some foreign brokers allow traders to exit trades before the binary option expires, but most do not. Exiting a trade before expiry typically results in a lower payout (specified by broker) or small loss, but the trader won't lose his or her entire investment. The Upside and Downside. There is an upside to these trading instruments, but it requires some perspective. A major advantage is that the risk and reward are known. It does not matter how much the market moves in favor or against the trader. There are only two outcomes: win a fixed amount or lose a fixed amount. Also, there are generally no fees, such as commissions, with these trading instruments (brokers may vary). The options are simple to use, and there is only one decision to make: is the underlying asset going up or down?
There are also no liquidity concerns, because the trader never actually owns the underlying asset, and therefore brokers can offer innumerable strike prices and expiration timesdates, which is attractive to a trader. A final benefit is that a trader can access multiple asset classes in global markets generally anytime a market is open somewhere in the world. The major drawback of high-low binary options is that the reward is always less than the risk. This means a trader must be right a high percentage of the time to cover losses. While payout and risk will fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades will cost the trader more than shehe can make on winning trades. Other types of binary options (not high-low) may provide payouts where the reward is potentially greater than the risk. Processing binary options in future exchange clearing. Images. G &mdash PHYSICS G06 &mdash COMPUTING CALCULATING COUNTING G06Q &mdash DATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR G06Q4000 &mdash Finance Insurance Tax strategies Processing of corporate or income taxes G06Q4004 &mdash Exchange, e. g. stocks, commodities, derivatives or currency exchange G &mdash PHYSICS G06 &mdash COMPUTING CALCULATING COUNTING G06Q &mdash DATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR G06Q2000 &mdash Payment architectures, schemes or protocols G06Q2004 &mdash 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ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR G06Q2000 &mdash Payment architectures, schemes or protocols G06Q2008 &mdash Payment architectures G06Q2010 &mdash Payment architectures specially adapted for electronic funds transfer EFT systems specially adapted for home banking systems G06Q20102 &mdash Bill distribution or payments G &mdash PHYSICS G06 &mdash COMPUTING CALCULATING COUNTING G06Q &mdash DATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR G06Q2000 &mdash Payment architectures, schemes or protocols G06Q2008 &mdash Payment architectures G06Q2010 &mdash Payment architectures specially adapted for electronic funds transfer EFT systems specially adapted for home banking systems G06Q20108 &mdash Remote banking, e. g. home banking G &mdash PHYSICS G06 &mdash COMPUTING CALCULATING COUNTING G06Q &mdash DATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR G06Q2000 &mdash Payment architectures, schemes or protocols G06Q2008 &mdash Payment architectures G06Q2010 &mdash Payment architectures specially adapted for electronic funds transfer EFT systems specially adapted for home banking systems G06Q20108 &mdash Remote banking, e. g. home banking G06Q201085 &mdash Remote banking, e. g. home banking involving automatic teller machines ATMs G &mdash PHYSICS G06 &mdash COMPUTING CALCULATING COUNTING G06Q &mdash DATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, 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COMPUTING CALCULATING COUNTING G06Q &mdash DATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR G06Q4000 &mdash Finance Insurance Tax strategies Processing of corporate or income taxes G06Q4002 &mdash Banking, e. g. interest calculation, credit approval, mortgages, home banking or on-line banking G &mdash PHYSICS G06 &mdash COMPUTING CALCULATING COUNTING G06Q &mdash DATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR G06Q4000 &mdash Finance Insurance Tax strategies Processing of corporate or income taxes G06Q4002 &mdash Banking, e. g. interest calculation, credit approval, mortgages, home banking or on-line banking G06Q40025 &mdash Credit processing or loan processing, e. g. risk analysis for mortgages G &mdash PHYSICS G06 &mdash COMPUTING CALCULATING COUNTING G06Q &mdash DATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR G06Q4000 &mdash Finance Insurance Tax strategies Processing of corporate or income taxes G06Q4006 &mdash Investment, e. g. financial instruments, portfolio management or fund management. Description. The present application is a continuation application of U. S. patent application Ser. No. 12403,193 filed Mar. 12, 2009 and entitled ЂњProcessing Binary Options in Future Exchange Clearing, Ђќ which is a continuation application of U. S. patent application Ser. No. 11465,028, filed Aug.
16, 2006 and entitled ЂњProcessing Binary Options in Future Exchange Clearing, Ђќ which claims the benefit of U. S. provisional patent application No. 60803,472, filed May 30, 2006 and entitled ЂњProcessing Binary Options in Future Exchange Clearing. Ђќ Priority is claimed to both applications and the entire disclosures of both applications are hereby incorporated by reference. FIELD OF THE INVENTION. The present invention relates to clearing positions for expired options, and more particularly, processing binary options as a non-tradeable cash-settled futures contract. DESCRIPTION OF THE RELATED ART. Clearing processes are performed for derivative products, such as options or vanilla options, after an expiration date for the derivative. Derivative products include options on futures contracts, futures contacts that are functions of other futures contracts, or other financial instruments that have their price related to or derived from an underlying product. A clearing house may process or clear the derivative in a similar manner as for other derivatives, such as in existing futures bookkeeping systems. The clearing house may break a derivative trade into a series of trades that appear to a member firms' bookkeeping systems as if they are standard monthly options on monthly cash-settled non-tradeable futures. That is, a series of trades are not futures and futures-options, but may provide the appearance as such so that they may be easily processed in existing bookkeeping systems.
Binary options, including binary range options, (also referred to as digital options) are cash-settled options that pay a fixed amount if the option ends up in-the-money. The payout amount does not depend on the amount by which the option ends up in-the-money. For a binary call, the option pays if the final value of the statistic or actual value is greater than or equal to a strike price for the option. For a binary put, the option pays if the final value is less than the strike price for the option. A binary range option may have multiple strike prices, such as a lower and an upper strike price. The holder of the binary range option receives (and the seller pays) the fixed payoff amount if the final value of the statistic ends up greater than or equal to the lower strike, and less than the upper strike. Because of the digital or binary nature of the option, existing clearing systems may not be readily configured to process or clear a binary or binary range option. To directly process these instruments, systems handle (a) the different product characteristicsЂ”for example, the binary range options, with fixed payouts and two strike prices, (b) trade quantities which may be expressed as nominal amounts and very large, and (c) strike prices which may be negative. Therefore, the clearing house will break up each trade in an actual auction instrument into a series of trades that appear to be ordinary options trades, in standard monthly options on cash-settled non-tradeable futures, and should flow through firm bookkeeping systems with practically no modifications. Such processing is time-consuming and requires cumbersome decomposition of the option. Therefore, there exists a need in the art for systems and methods for conveniently clearing and processing binary options. SUMMARY OF THE INVENTION. Systems and methods are described for processing binary options (also referred to as digital options) in existing clearing systems, such as futures clearing systems.
The binary option is treated, or processed, similar to standard options on a non-tradeable cash-settled underlying futures contract. A hypothetical instrument, referred to as a book instrument is created to facilitate clearing of the binary option. The book instrument has an expiration date after the expiration of the binary option, such as the day after the expiration of the binary option. For each binary option that expires in the money, a transaction is created for the book instrument future. The underlying book future has an assigned price that is one less that the final price for the underlying statistical or actual value of the binary option at expiration. Transactions are loaded in the clearing system and processed and all positions are liquidated. Options exercise and assignment processing is performed in the clearing system as well as an associated clearing firm bookkeeping system. Of course, the methods and systems of the above-referenced embodiments may also include other additional elements, steps, computer-executable instructions, or computer-readable data structures. In this regard, other embodiments are disclosed and claimed herein as well. In other embodiments, the present invention can be partially or wholly implemented on a computer-readable medium, for example, by storing computer-executable instructions or modules, or by utilizing computer-readable data structures. The details of these and other embodiments of the present invention are set forth in the accompanying drawings and the description below. Other features and advantages of the invention will be apparent from the description and drawings, and from the claims. BRIEF DESCRIPTION OF THE DRAWINGS. The present invention may take physical form in certain parts and steps, embodiments of which will be described in detail in the following description and illustrated in the accompanying drawings that form a part hereof, wherein: FIG.
1 illustrates a computer network system that may be used to implement aspects of the present invention and. FIG. 2 illustrates a flowchart for an exemplary method for clearing binary options, in accordance with an embodiment of the invention. Exemplary Operating Environment. Aspects of the present invention are preferably implemented with computer devices and computer networks that allow users to exchange trading information, such as market data. An exemplary trading network environment for implementing trading systems and methods is shown in FIG. 1 . An exchange computer system 100 receives orders and transmits market data related to orders and trades to users. Exchange computer system 100 may be implemented with one or more mainframe, desktop or other computers. In one embodiment, a computer device uses a 64-bit processor. A user database 102 includes information identifying traders and other users of exchange computer system 100 .
Data may include user names and passwords. An account data module 104 may process account information that may be used during trades. A match engine module 106 is included to match bid and offer prices. Match engine module 106 may be implemented with software that executes one or more algorithms for matching bids and offers. A trade database 108 may be included to store information identifying trades and descriptions of trades. In particular, a trade database may store information identifying the time that a trade took place and the contract price. An order book module 110 may be included to compute or otherwise determine current bid and offer prices. A market data module 112 may be included to collect market data and prepare the data for transmission to users. A risk management module 134 may be included to compute and determine a user's risk utilization in relation to the user's defined risk thresholds. An order processing module 136 may be included to decompose delta based and bulk order types for processing by order book module 110 and match engine module 106 . The trading network environment shown in FIG. 1 includes computer devices 114 , 116 , 118 , 120 and 122 . Each computer device includes a central processor that controls the overall operation of the computer and a system bus that connects the central processor to one or more conventional components, such as a network card or modem. Each computer device may also include a variety of interface units and drives for reading and writing data or files.
Depending on the type of computer device, a user can interact with the computer with a keyboard, pointing device, microphone, pen device or other input device. Computer device 114 is shown directly connected to exchange computer system 100 . Exchange computer system 100 and computer device 114 may be connected via a T1 line, a common local area network (LAN) or other mechanism for connecting computer devices. Computer device 114 is shown connected to a radio 132 . The user of radio 132 may be a trader or exchange employee. The radio user may transmit orders or other information to a user of computer device 114 . The user of computer device 114 may then transmit the trade or other information to exchange computer system 100 . Computer devices 116 and 118 are coupled to a LAN 124 . LAN 124 may have one or more of the well-known LAN topologies and may use a variety of different protocols, such as Ethernet. Computers 116 and 118 may communicate with each other and other computers and devices connected to LAN 124 .
Computers and other devices may be connected to LAN 124 via twisted pair wires, coaxial cable, fiber optics or other media. Alternatively, a wireless personal digital assistant device (PDA) 122 may communicate with LAN 124 or the Internet 126 via radio waves. PDA 122 may also communicate with exchange computer system 100 via a conventional wireless hub 128 . As used herein, a PDA includes mobile telephones and other wireless devices that communicate with a network via radio waves. FIG. 1 also shows LAN 124 connected to the Internet 126 . LAN 124 may include a router to connect LAN 124 to the Internet 126 . Computer device 120 is shown connected directly to the Internet 126 . The connection may be via a modem, DSL line, satellite dish or any other device for connecting a computer device to the Internet. One or more market makers 130 may maintain a market by providing constant bid and offer prices for a derivative or security to exchange computer system 100 .
Exchange computer system 100 may also exchange information with other trade engines, such as trade engine 138 . One skilled in the art will appreciate that numerous additional computers and systems may be coupled to exchange computer system 100 . Such computers and systems may include clearing, regulatory and fee systems. The operations of computer devices and systems shown in FIG. 1 may be controlled by computer-executable instructions stored on computer-readable medium. For example, computer device 116 may include computer-executable instructions for receiving order information from a user and transmitting that order information to exchange computer system 100 . In another example, computer device 118 may include computer-executable instructions for receiving market data from exchange computer system 100 and displaying that information to a user. Of course, numerous additional servers, computers, handheld devices, personal digital assistants, telephones and other devices may also be connected to exchange computer system 100 . Moreover, one skilled in the art will appreciate that the topology shown in FIG. 1 is merely an example and that the components shown in FIG. 1 may be connected by numerous alternative topologies. FIG. 2 shows a flowchart for an exemplary method for clearing options. In the method, a binary option may be processed without cumbersome decomposition into vanilla options.
In an embodiment, a clearing system is used to process an expired binary option. The binary option is processed as a standard option on a non-tradeable cash-settled underlying future, also referred to as a Ђњbook instrument. Ђќ (i. e. it is only to facilitate processing in clearing firm bookkeeping systems.). The book instrument is defined to have an expiration date after the expiration of the corresponding binary option. For example, the book instrument may have an expiration date the day after the expiration of the corresponding binary option. In other embodiments, the book instrument and binary option may expire the same day with the binary option expiring before the book instrument. The non-tradeable underlying future's maturity date may also be set to expire the business date after the real option expiration date. On or before the real expiration date, trading ceases for the binary option. Option expiration processing for the binary option is not run on the normal expiration date for the binary option, since the date is defined in the clearing system according to the book instrument as the next business day. On the expiration of the book instrument, such as the day after or intra day after the expiration of the binary option, exactly liquidating transfer transactions are created, loaded into the clearing system, and transmitted to clearing firms for loading into their bookkeeping systems, for each expired binary option position.
For example, if a position in an expiring option was 35 long by 17 short, then a sell trade for 35, and a buy trade for 17 are created. These transfer transactions are defined as liquidating, either trade by trade (if that is how the clearing system operates for these products), or implicitly by specifying an ending position (Ђњposition change specificationЂќ, or PCS) of zero by zero. For each binary option position which has expired in-the-money, transactions are created for the underlying ЂњbookЂќ instrument future, at a price with a value a fixed amount, such as one, less than the final price for the underlying statistic of the binary option: i) For long call and short put positions, the book-instrument futures transaction is created as a buy transaction and ii) For short call and long put positions, the book-instrument futures transaction is created as a sell transaction. The liquidating transfer transactions for all the expired binary option positions, and the Ђњbook-instrumentЂќ futures transactions for those which finished in-the-money, are loaded into the clearing system. This in turn causes messages to be transmitted to clearing firms to allow the transactions to be loaded into clearing firm bookkeeping systems. As clearing processing continues, no other transactions in these options are allowed to clear on that day no special option instructions (exercise notices or option abandonments) are accepted, nor any position adjustments or other transaction which could affect the ending option position. The net effect, together with the liquidating transfer transactions that have been posted to the expired option positions, is that all such positions are liquidated. Option exercise and assignment processing is run normally in both the clearing system and in clearing firm bookkeeping systems for the binary option positions, as if they were vanilla options, since the expiration date in the clearing system has been set to a later date or time, such as the next business day. However, since all of these option positions have been liquidated, there are no positions to exercise or assign, even for the ones which finished in-the-money. Hence the fact that exercise and assignment processing is run as if for vanilla options, creating transactions at the strike price, has no effect. At the first clearing settlement cycle of that day, the special futures transactions for the in-the-money options, created at a fixed price, such as one, less than the final value of the option's underlying statistic, are marked-to-market to that final value. This process, which occurs in both the clearing system and in clearing firm bookkeeping systems, causes the binary payout cash flows to occur. Money calculations for the book instrumentsЂ”When calculating premium for trades in futures options in a bookkeeping system, the trade price is multiplied by the contract value factor (the multiplier that converts the quoted price to its monetary value) and the trade quantity.
In other words, for futures options, calculate the premium for a quantity of one, then round, then multiply by the trade quantity. The present invention has been described herein with reference to specific exemplary embodiments thereof. It will be apparent to those skilled in the art that a person understanding this invention may conceive of changes or other embodiments or variations, which utilize the principles of this invention without departing from the broader spirit and scope of the invention as set forth in the appended claims.
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