Is a Financial Spread Bet the Same as a Binary Option?
We’re often asked what is the difference is between a financial spread bet and a binary option trade. This is a great question, because the line between the two is a bit blurry, especially to the layman. They are both speculative plays based upon whether you believe the underlying security will be higher or lower than it’s current value in the market, at a predetermined time. They are also similar in the aspect that they both only have two possible outcomes. You either win, or you lose. Additionally, neither financial spread bets, nor binary options, allow you to take possession of the underlying security. However, that’s where the similarities end.
A Brief History Lesson
In order to best highlight the differences in financial spread bets and binary options, we should examine their history. A young unemployed stockbroker named Stuart Wheeler started the concept of spread betting in 1974. Wheeler wanted to offer small investors the opportunity to make money on the price movements in gold, without having to buy or sell the commodity itself. He created an index based on gold prices and started taking bets on whether the index would go up or down.
If Stuart Wheeler’s idea sounds familiar, it is because he wasn’t the originator of it. This was the same concept as the Wall Street bucket shops of the early 1900s that allowed average citizens to place bets on the direction of stocks, even if they didn’t have the ability to buy or sell any shares.
Binary options, on the other hand, were spawned from the traditional options market. They were an obvious extension of options trading, using an exotic mechanism to create a simpler, more transparent form of trade with less speculation. Although the concept was developed early on, binary options were treated as a simple over-the-counter instrument for many years. As a result, there didn’t exist an actual liquid market, and there was no regulation whatsoever of binary options. The modern binary option, which is usually purchased on its own by a trader, was virtually unheard of, and binary options were instead only one small part of a larger complex contract.
Binary options really came of age in 2007, when the Options Clearing Corporation made a proposal for a rule change to allow binary options to be traded on major markets. In early 2008 the SEC approved that rule change, making it legal for markets to list binary options as tradable contracts. In May of 2008 the American Stock Exchange became the first exchange to publicly offer binary options, and the CBOE soon followed suit.
This brief history of financial spread betting and binary options trading quickly illustrates the main difference between the two. A financial spread bet is more akin to gaming, whereas binary options are a simpler form of options trading. Either way, there are quick profits to be made, but there is also plenty of risk.
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