On Exchange Binary Option Products

Moving to option products offered on the exchanges, the choice here is currently as follows. In terms of exchange traded binary options, there are several available, namely those offered by the CBOE, Nadex and the NYSE.
In the future other exchanges will come on stream, and waiting in the wings is Cantor Fitzgerald who received authorization both for clearing and for market making by the CFTC.

This will allow Cantor to begin offering binary options in due course, but at time of writing there is no date set for the launch of this exchange. If we start with the binary options offered by the CBOE (Chicago Board Options Exchange) there are currently two options available, the BSZ and the BVZ. The first is based on the S&P 500 index, and the second on the CBOE volatility index. As always with any exchange traded product the role of the exchange is to match buyers and sellers and create an orderly, fair and transparent market.

To trade these options offered by the CBOE, you will need a specialist futures and options broker as unlike Nadex, you cannot trade direct with the exchange.BSZ:In many ways the BSZ binary option is a hybrid as it bridges the gap between the world of exotic and vanilla options. The key points are as follows with the underlying market being the S&P 500:At expiry the option either pays $100 or $0 .

Prices quoted are the probability of reaching or exceeding the strike price at expiry Options are quoted as Calls or Puts Strike prices are quoted in a conventional option chain and with a 5 point interval Three consecutive near term contract months will be listed These are European style binary options which can only be exercised on the last business day prior to expiration Bids and offers are expressed as 0.01 to 1.00 with a minimum tick of $1 (0.01) and a contract multiplier of 100 .

The option can be closed at any time prior to expiry by reversing the opening position Last trading day for the BSZ is Thursday before the third Friday of the expiration month Expiry is the Saturday following the third Friday of the expiration month These binary options can be bought or sold to open, just as for regular vanilla options A margin account will be required for writing options As you can see from the above, this form of binary option is really a bridge between vanilla and exotic options.

For example, the ability to buy or sell to open is very different from the off exchange approach. Here a sell order to open results in a credit in terms of the ‘premium’, but also requires margin to cover the balance of any open positions in your account, which is of course limited by the capped risk. This is very different from writing vanilla options where risk can be unlimited – something we will explore shortly.

BVZ:The BVZ binary is similar to the BSZ, and is based on the VIX, so here you are trading volatility directly, by taking a view on the VIX which is the underlying asset in this case. The key points for this option are as follows:
At expiry the option either pays $100 or $0 Prices quoted are the probability of reaching or exceeding the strike price at expiry .

Options are quoted as Calls or Puts Strike prices are quoted in a conventional option chain and with a 1 point interval Three consecutive near term contract months will be listed These are European style binary options which can only be exercised on the last business day prior to expiration Bids and offers are expressed as 0.01 to 1.00 with a minimum tick of $1 (0.01) and a contract multiplier of 100.

The option can be closed at any time prior to expiry by reversing the opening position Last trading day for the BVZ is Tuesday before the expiration date of each month Expiry is the Wednesday which is 30 days prior to the third Friday of the following month These binary options can be bought or sold to open, just as for regular vanilla options A margin account will be required for writing options Once again to trade these binary options you will need a margin account and specialist broker.The next group of binary options is more extensive and are offered by the New York Stock Exchange (NYSE).

However, they are not referred to as binary options, but as binary return derivatives and classified on the exchange as ByRDs. There are approximately 70 of these currently available primarily covering individual stocks, ETFs and funds. The instrument is quoted as one of two types:Finish High ByRDs Finish Low ByrDs You can think of these as calls and puts. The Finish High is a call and the Finish Low is a put. The broad principles of these are the same as for those offered by the CBOE, and the key points are as follows:At expiry the option either pays $100 or $0 Prices quoted are the probability of reaching or exceeding the strike price at expiry.