Binary Options - Opening Price 0.5?

opmtrader · Post by **opmtrader** » Sun Apr 01, 2007 6:49 pm

Does anyone here trade one day binary options on the S&P500? I am curious if there are contracts which allow you to bet if today's close will be higher than today's open. I imagine this is a fairly standard one day option.

What I am wondering is, do these contracts religiously start off at around 0.5 (0 - 1 scale)? Are there many instances where the binary market will be priced at 0.6+ at the open, suggesting that the market will close higher than the open?

The reason I ask is that I have created a system that predicts the day's direction with 68% accuracy, but has a W/L ratio of only 0.88. Thus using binary options I could eliminate the maginitude issue and simply profit from the directional accuracy. However if the binary market is already priced at 0.65 or something at open, there goes my profits. This system trades quite infrequently so don't hink I've found the Holy Grail here.

This also begs the question, if the binary market is predicting a higher close, would this be a good enough indicator to go long the underlying?

mib · Post by **mib** » Mon Apr 02, 2007 10:44 am

[i]do these contracts religiously start off at around 0.5[/i]

These contracts are priced at 0.5 only in very old religions (you know, the monotheistic "One Distribution to Rule them all"). People who worship the Holy Skew price them differently. Hint: recognize the duality hidden in the digital and price it as a very tight call spread with the Holy Skew inducing different vols for the two legs.

FDAXHunter · Post by **FDAXHunter** » Mon Apr 02, 2007 12:55 pm

Skew on one day options? Oh please. There are many factors influencing the price of a one-day binary, but skew is not one of them.

opmtrader, I think what you are looking for is this: http://www.binarybet.com/

You will note that they are indeed priced roughly around 0.50, for the short term stuff.

Cheng · Post by **Cheng** » Mon Apr 02, 2007 1:42 pm

Just out of curiosity, isn't jump-risk the biggest driver in those maturities. I can hardly imagine that a stock goes up or down that much within a day continously. A single jump for whatever reason seems more natural to me.

But what the hell do I know.

FDAXHunter · Post by **FDAXHunter** » Mon Apr 02, 2007 2:25 pm

Ignore all the theoretical stuff for a moment and think about the following question: Assuming relatively efficient and liquid markets, what is the probability p that the (insert stock index of choice here) will close tomorrow above today's close?

Cheng · Post by **Cheng** » Mon Apr 02, 2007 2:45 pm

Gotcha. Given no prior information 50% assuming a uniform distribution (means no prior information).

Thanks.

opmtrader · Post by **opmtrader** » Mon Apr 02, 2007 3:39 pm

FDAXHunter, simple, concise, and accurate as always. Thanks.

That site looks good. As I noted, I am not sure I will devote the time to setting something like this up over one setup, but should I find enough systems with the same behavior, it is good to know that an instrument exists that would allow me to extract the maximum profitability.

0.68*1 > 0.68*0.88 : )

filthy · Post by **filthy** » Mon Apr 02, 2007 3:42 pm

sadly as a resident of the USA you will not be able to use the site.

yay freedom!

uranasss · Post by **uranasss** » Mon Apr 02, 2007 4:16 pm

What kinda size can you do on here? This is fun Cool

DynamicReplicator · Post by **DynamicReplicator** » Mon Apr 02, 2007 6:36 pm

I used to trade on tradesports.com, which had binary options, and touch contracts. They don't list those on that site anymore, but they are traded on intrade.com which is the same exchange.

I live in the U.S. and was able to trade on it, but I don't know if you still can or not since the crackdown on internet gambling...I haven't tried in a couple years.

On this site, the contracts are bets on whether the index will close higher than yesterday's close (not today's open), so obviously, when the underlying index opens for trading these will not always be priced at 0.5 because the futures markets may be higher or lower.