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Binary Option Derivative Trading and the Fintech Innovation 

There is no arguing that there has been a major financial technology revolution over the past few years.  Only a decade ago, we were completely oblivious of crowd funding, peer to peer landing, Bitcoin, block chain protocols, and many more financial innovations.  One of the most innovative, and fascinating instrument that has been coined “the rising star” is the Binary Option.  Binary Options have played one of the most intricate roles in revolutionizing the derivative trading industry, by bringing it to the layman, to the masses.  No longer is derivative trading restricted to professional brokers or investors; the Binary Option has made it so that anyone can be a trader.

The Binary Option is actually a derivative product that has been used by professional investors for decades.  Comprise the bulk of the global OTC derivatives market with a national value of $500 Trillion.[1]  Just for comparison, the size of the global stock market is only $62 Trillion.[2]  The Warren Buffett company, Berkshire Hathaway posted $633m in gains from derivatives contracts last year, up from $329m in 2014.[3]  However, rising FinTech has created user-friendly binary option platforms, so that not only big investors can use derive instruments, but basically anyone with the slightest interest in the market who has a 3G signal.

Henceforth, the uprising of the retail derivative trader in the last few years is due to the progress in the technology infrastructure and cost reductions.  The average U.S. Internet speed has more than tripled since 2011 from 10 Mbps to 31 Mbps.[4]

The cost of cloud infrastructure has dropped more than 90% over the last decade.[5]

All of these changes and more have made trading derivatives available not only to fortune 500 companies and billionaires, but also for the regular internet surfer with a credit card.   Today there are millions of retail binary option traders who trade with online brokerages like Bbinary, 24option and IG (IG: market cap of 3 Billion GBP).

As the technology continues to develop, and to support the continuous and expanding innovate demands of retail derivatives, there is a movement of major companies joining the industry, such as the NYSE Amex Options platform. [6]

“The introduction of Binary Return Derivatives, or ByRDs, on NYSE Amex Options gives investors access to a new, simple income-generation tool with the same level of flexibility as standard listed options, plus a straightforward, fixed return,” said NYSE Head of Options Ivan Brown. “We’re excited to offer investors these innovative and solutions-driven investing tools.”

“We are living in an exciting time that the rapid growth of technology innovation keeps us alert every day.” says Ran Amiran, President of SpotOption.

 

Media Contact:

Tammy Levy

tammyl@spotoption.com

 

About SpotOption

SpotOption is a technology company who develops trading platform for derivative products.

SpotOption was established in 2009, and has 250 employees in offices around the globe, including London, HK, and the Middle East.

 

 

[1] https://www.bis.org/publ/otc_hy1605.htm

[2] http://data.worldbank.org/indicator/CM.MKT.LCAP.CD

[3] http://www.businesswire.com/news/home/20160227005005/en/Berkshire-Hathaway-News-Release

[4] http://bgr.com/2016/01/02/us-internet-speeds-average/

[5] http://insights.wired.com/profiles/blogs/2014-in-the-cloud-three-things-we-ve-learnt-so-far#axzz4E0hhbaeB

[6]  https://www.nyse.com/products/options-byrds

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Methodologies for Pricing Binary Options  Deriving the Binary option from a “call” or “put” spread strategy

Have you ever wondered how the pricing of derivatives works behind the scenes?  Pricing derivatives, and specifically binary options, is quite a challenge from the market making perspective.  With years of experience as a broker and market maker in the OTC derivatives market, and currently as the head of market making and risk analysis at SpotOption, I would like to provide some insight on how pricing works for binary options.   In this document, I will describe two main methodologies that we actively practice, each one with its own advantages and disadvantage.

Methodology 1:  Deriving the binary option price from market quotes of vanilla “call” or “put” spread

There are many variations of this well-known formula, the most popular is the classic B&S, for a “call” option:
Image1

 

 

In general, once you have the standard deviation, the spot rate and interest rate of any long term Vanilla option can be priced for a specific expiry and strike rate. A vanilla option is a simple option that allows the buyer of the option the opportunity (not the obligation) to buy an underlying asset at a predetermined price/strike price for a price or premium. This opportunity will have an expiry at a future and predetermined date. The following chart shows a call option that started with a negative value to the cost of the option, and increases as the underlying asset increases above the strike price:

Image2

 

 

 


The Seller of the option is on the other side of this zero sum game, and he receives a premium for the risk that is taken.
  If the price goes higher than the strike price, he will start to lose money as can be seen on the chart below:

Image3

 

 

 

 

 

A combination of buying a call option, and selling another call option with a higher strike price is often referred to as a call or bull spread strategy. A combination of buying a put option and selling another put option with a lower strike is often refereed to as a put or bear spread strategy.   An example of a call spread strategy looks like the chart below.

 Image4

 

 

 

The premium for the call spread strategy is lower than a simple call option, however, the profit has maxed at the strike of the call option that has been sold. This strategy can be easily priced for options with maturity date longer than a week as the market volatility is well known.  A binary option (unlike the vanilla call option) gives a fixed payout for the call option. In many ways it looks like the call spread strategy where the strike of the call option sold is higher than the strike of the call option bought by a number so small that is close to zero.

 Image5

 

 

 


So, when pricing a long call binary option, one of the possible methodologies is to buy call option at a strike of X and sell call option of a price of X plus 0.00000001. This methodology is robust where markets are liquid and quotes of options and standard deviations are available. This high liquidity can be found in assets with high volumes and expires longer than a week.

When pricing options for shorter period of times, such as “end of day”,  a different methodology can be used.

Methodology 2: Deriving the binary option price from a call or put spread when there are no market quotes  

  Unlike long term binary options (day, weeks or month), when trying to price  an option for a few minutes or hours, there is no well known and agreed standard deviation quoted in the markets. Therefore one should individually calculate the market deviation using the last known ticks.  For example, if we wish to price a binary option for 10 minutes we can manually calculate the standard deviation using best practice formulas:

Image6

 

The only question is, what time period should be taken when calculating this standard deviation? My experience has taught me that for single-hour options, the standard deviation should be taken based on up to 3 hours back-log, as long as you stay in the same trading session.  That is, if we are trading in the European session, we can create the standard deviation by looking at the last few hours as long as we don’t go before the opening of the main European markets. The advantage of this model is the ability to price the binary option using a standard deviation when there is no quotes in Reuters or Bloomberg terminal for those standard deviations. The disadvantage of this algorithm is that you quote an option based on a theoretical quotes, with no other market quotes to compare to, and if calculated incorrectly, it can lead to losses. 

Summary

Pricing short term binary options is quite a challenge, but can be done rationally. When pricing a short term binary option, one must calculate the volatility manually through known formulas and parameters optimization (as described in Methodology 2).  Pricing long term options, such as those that expire in days, weeks, and months is relatively easier.  One simply has to take a well-known formula, such as black and Scholes, and insert the spot market rate, volatility or the volatility surface, as well as the interest rates, and you price the call or put spread. The relevant data can be taken from different data suppliers such as Bloomberg or Reuters, or derived from exchange traded options.

Quotes of binary options, both for long or short term can be seen in exchanges of binary options or through the OTC market, such as the SpotOption Platform.

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What Is a whitelabel

A white label is an independent operator that chooses to receive a license to use the SpotOption software. With the purchase of this license, operators receive all of the programs and services that SpotOption offers, fully branded to the look and feel of their choosing. This can either be as an independent operation or part of an already existing brand.

The White Label will then begin collecting revenues, and share a portion of it (commission) with SpotOption for providing them with their ongoing service and technology.

 

Benefits:

  • Receive a turnkey solution
  • Saves costs on IT infrastructure, development, and staff
  • Establishes a presence in the popular and growing Binary Options industry
  • Affordable with minimal upfront costs
  • 24/7 first class support from our staff
  • State-of-the-art design aimed at your target market
  • Integration to the hottest trends in trading including live chat, news, charts, and market analysis
  • Management by industry’s top financial and technical professionals
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What are Binary Options?

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 CySEC, Europe, 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.

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SpotOption Ltd. Partners with LivePerson

19 July, 2011 – Leading Binary Options platform providers, SpotOption Ltd., partners with Intelligent Engagement Solutions provider, LivePerson.
SpotOption Ltd. announces their latest partnership with LivePerson, Inc. which allows the integration of the LivePerson chat platform into all the Binary Option white labels of SpotOption, Ltd. LivePerson clients and partners can extend and integrate LivePerson’s chat, voice and content solutions for social media, mobility, CRM, advertising and marketing. LivePerson’s chat platform embedded into the homepage of the SpotOption brands, creates real-time connections that help sales and retention by providing a user-friendly, efficient communication portal between end-user and operator.
Besides providing the platform which has the strongest technology and Risk Management available today, SpotOption provides white labels with the communication platform of choice, through LivePerson. As SpotOption encourages their brands to be highly available and accessible to their traders, the LivePerson chat platform is the perfect media for doing so. When a trader is assured that there is a team behind the operation, that is there to support and guide them, it increases trader trust and trader loyalty. Connecting traders with the operator is one of many methods that SpotOption uses to increase the value of the website, and ensure it’s quality.
“We believe that communication between end-users and the trading experts of the white labels is vital to the success of the site. Traders need to know that they have ongoing support,” says Pini Peter, CEO of SpotOption. “Partnering with LivePerson was the best solution to allow this engagement.”

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SpotOption Adds “End of Year Expiries” & “Pairs” to Offering

May 4, 2012 – Leading Binary Options platform provider, SpotOption Ltd. now offers White Labels two new options – “End of Year”and “Pairs”.
SpotOption Ltd. announces the latest addition to their portfolio of offerings – “End of Year” and “Pairs”. SpotOption is known for constantly adding new and exciting features, making it the most advanced and successful binary options platform.
The “End of Year” option allows traders to take an option until the end of each month or until the end of December 2012. Within each calendar month, traders are also able to open positions for two weeks or other specific time periods. This feature opens the market to all types of traders, as SpotOption White Labels now have the longest span of option expiries – from sixty seconds to six months. This new feature allows the White Label to be very flexible to their trader’s needs.
The other new feature is the “Pairs” option, which allows traders to predict the relative ratio between two assets from the same equity type. With regular binary options, a trader would predict, for example, the price of gold. With “Pairs”, they will predict how strong or weak one asset will be as compared to another. For instance, a trader is able to trade relative strength strategies on financials, such as BNP Paribas compared to Barclays or Apple compared to Google. This trading is more exotic, giving traders the ability to trade on relative strengths or weaknesses and not absolute strengths.
“Staying ahead of industry trends is our responsibility to our white labels,” says Pini Peter, CEO of SpotOption Ltd. “Our developers work round the clock to ensure that we live up to our reputation of industry leaders.”

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And the Best Binary Options Platform Provider is…

LIMASSOL, Cyprus, November 7, 2014

Leading binary options platform provider, SpotOption, is the proud recipient of the China Online Trading Summit Award
SpotOption announces another award is under their belt, as they were the chosen binary options platform provider at the 2014 COTS awards on October 31, at the Shanghai Exhibition Center. The award was designed to identify and reward the binary options provider who has demonstrated an unparalleled ability to succeed and has continually set standards of excellence worldwide and especially in China. The judging panel was made up of internationally recognized and respected judges from a variety of related sectors and disciplines, and the panel was carefully selected to ensure that the judging process was fair and objective.
SpotOption recently opened its office in Hong Kong, at the distinguished Centrium building, in the heart of the metropolis. The opening of the Hong Kong office was a strategic decision based upon the demand of the Chinese population for binary options. SpotOption’s award-winning platform is ideal for the Chinese market, and the office was opened to give Chinese brokers local sales representation, account management, and support at the highest and most efficient level possible.
“We’re honored to receive this award in China,” says Ran Amiran, CEO of SpotOption. “Opening our Hong Kong branch took a lot of research and hard work, as did hiring our team of Chinese experts. I’m glad that our extra efforts in China were recognized by the COTS judges, and I would like to extend my gratitude to them, and of course to the whole SpotOption team who works round-the-clock to provide the best binary options platform worldwide.”

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Best Binary Option Platform Provider for 2014

SpotOption is honored to be awarded on the second consecutive year as the Best Binary Option Platform Provider by the MENA Forex Show in Dubai.

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Become A White Label

SpotOption welcomes all online operators that are committed to succeeding in the Binary Options industry. In order for us to better understand your business needs, please fill out your details below , and we will get back to you as soon as possible to discuss a potential collaboration.

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SpotOption Ltd. Joins Forces with Leverate

January 1, 2011 Leading Binary Options platform provider, SpotOption Ltd., has embarked on a partnership with premium broker solution provider, Leverate.

SpotOption Ltd. announced their latest strategic alliance with Leverate, enabling Leverate to implement SpotOption’s binary options platform into their traditional forex solution for entities or new brokers that wish to offer the world’s most popular trading platform MT4 (MetaTrader) “Leverate Private Label Solution”. This partnership will allow SpotOption to receive Leverate’s cutting-edge technology and breakthrough algorithms to branch their services into forex trading as well.

As a provider of comprehensive forex broker solutions, Leverate offers brokerage solutions whether you are looking to start your own forex brokerage company or looking to replace your existing solution. As Leverate is dedicated to providing their forex brokers with the most current and in demand options, SpotOption’s binary options platform is the perfect addition to their Private Label Solution portfolio.

Binary Options has received mass interest from professional traders and amateurs alike. The simplicity and low risk of the option makes it a very attractive model for those looking for a quick and simple investment. In essence, all a trader has to do is predict whether an asset’s price is going to rise or fall by a designated expiry time.
Through Leverate, dozens of brokers around the world will enjoy SpotOption’s platform for simple, fast, and low-risk investments. By choosing SpotOption to empower the binary options sector, Leverate has access to the most advanced features and services that binary options have to offer. SpotOption’s platform includes the most robust trading engine available today, as well as unique profit maximizing features that have proven to bring mass traffic and popularity to websites powered by the SpotOption platform.

“We know that Leverate is committed to providing forex brokers around the world with the latest technologies and products, and that’s why we’ve chosen them to be our business partner,” says Pini Peter, CEO of SpotOption Ltd. “We are sure that Leverate’s clientele will receive the platform with the same enthusiasm and success that our existing white labels have.”

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