1 binary options trading involves publicly traded stocks and commodities
As we mentioned earlier, stocks are usually traded for a maximum of 6 to 8 hours a day. As such, the US markets are used as the benchmark of checking the trading hours for stocks. US stock markets usually trade from 9. If you are trading stocks in the binary options market, pay attention to the times at which the stock markets in which they are listed are in operation. The diagram below gives a perfect illustration of this.
You also need to know that the local currencies of the active time zones will have increased volatility over others. Another way of studying the trading times would be to group the commodities under the exchanges where they are traded.
As such, the agricultural commodities, which are traded in the Chicago Mercantile Exchange, are more actively traded from 9. This organization is equally owned and supported by all U.
The OCC is able to recognize, segregate, calculate and disseminate information from the various exchanges, and to facilitate the fungibility described above in large part due to the standardized symbology scheme detailed below. Systems for calculating delivery and payment amounts due between participating parties rely on this standardization. Options that are traded on national securities exchanges are standardized, and therefore fungible through the use of identical contract terms such as expiration cycles and pre-defined parameters.
For example, all non-FLEX exchange-traded securities options expire on the Saturday following the third Friday of any given month. The issuer of each option contract is the OCC regardless of where the option trades. A writer of a standardized option cannot create or choose a different expiration date. The writer cannot change or define any strike price, but for any given option, must select from a specific set of available strike prices.
Similarly, not all expiration months are simultaneously available for all standardized option series. One convention that is central to the standardization of options is an agreed- upon scheme by which all options exchanges assign and attach symbols.
The convention allows for options to have symbols with a maximum of 5 characters. Each character has 26 possibilities, corresponding to the 26 letters of the alphabet.
The first one, two or three characters known as the root symbol denote the underlying asset for the option. In some cases this corresponds exactly to the underlying asset's trading symbol, in other cases there is no relationship between the two. These codes are listed in table I. The final character denotes the strike price for the option. The strike price codes are listed in table II.
Generally, there are several expiration months available for each equity option. Moreover, there are several strike prices available for each expiration month of each option. Therefore, for a single stock there are often several options series traded and it is not unusual to have 60 different options series available for a single stock or options class. Thus, it will be apparent that for each options class, there may be several option series, each of which are separately priced.
For example, assume PQR Corp. Thus, by referring to the above symbology scheme, all interested parties recognize this symbol as denoting an option for the underlying asset PQR derived from the first three characters in the symbol - PQR , which is a call option expiring in October denoted by the "J" , with a strike price of 70 denoted by the "N".
This five 5 character symbology is an industry-wide convention for the processing of standardized exchange-traded options contracts. Options that cannot be made to fit within the 5 character symbology cannot be exchange-traded, because current industry systems only recognize the 5 character symbology. All other option styles, including European-style binary options, have traded OTC, where systems and processes are more flexible and can be made to recognize and accept a vast scope of varying option contract terms, and where a symbology scheme does not exist to limit product scope.
For current standardized options, at expiration a determination is made as to whether the option expires in-, at-, or out-of-the-money. This is determined by establishing an agreed-upon definitive settlement closing price for the underlying security, which is compared to each strike price to determine if the settlement closing price was greater than, equal to, or less than the strike price.
With current standardized options there are standardized procedures that are followed to determine the settlement closing prices. For example, for traditional put and call equity options, the OCC determines the settlement closing price by taking the last reported composite trade at the close of trading, i.
For index options, the designated reporting authority i. The OCC then compares the settlement closing value to existing strike prices to determine which options are in-, at-, or out-of-the-money. In the case of some index options, this value is calculated not by looking at any one price of any one index or security at any one particular time, but rather is derived by taking a volume weighted average price NWAP of underlying securities over a designated period of time.
Standardized call and put equity options traded on the options exchange require a holder to tender exercise instructions in order for the option to be exercise or not exercised at expiration. For the purpose of convenience, the OCC, as issuer, has implemented an "Exercise-by-Exception" procedure which will exercise an option without specific exercise instructions if the option is in-the-money by the exercise threshold amount or more.
The exercise threshold amount effectively triggers an automatic exercise. The application of the "Exercise-by-Exception" procedure will occur in all cases except where a holder of an option delivers contrary instructions.
This feature significantly differentiates FROs from traditional, exchange-traded options. It has long been recognized that in order for a market to remain viable, participants must have a level of comfort and trust that they are transacting in a "fair" environment. Organized exchanges in the U. Since the adoption of the Securities. Exchange Act of , which created the SEC, particular focus has been paid to ensure that markets are not susceptible to manipulation.
The SEC was created in part to stem the specific practice of "gaming" or manipulating stock prices such as was done by. Market fairness and integrity is a necessary underpinning of any market, as well as in the trading in any particular product or security upon any market. The exact price at which any security closes on any given day can have important consequences.
As discussed above, the closing price of an underlying security prior to expiration of an option has particular importance, as it is that value which dictates whether the option closes in, at or out-of-the-money. Accordingly, significant regulatory and surveillance efforts are employed by organized exchanges, self-regulatory organizations SROs and other regulatory bodies in an effort to detect, deter and eliminate potential manipulation of an underlying security that is near an option strike price at expiration.
Tremendous liquidity has been achieved in the exchange-traded options market, largely the result of standardization. The primary benefit of standardization and the reason for the tremendous liquidity is the interchangability or fungibility of option contracts regardless of where the option was originally executed. As a result, multiple contra-parties may exist. In the OTC markets, this benefit does not exist. In the case of multiply-listed or multiply-traded options option classes listed and traded on more than one options exchange , standardization makes it possible to purchase an option contract on one exchange, and then sell it on another.
Binary options have never been traded on a national securities exchange in a standardized form. There is a need in the art to provide liquidity in the binary options market, and there thus exists a need in the art for systems and methods for trading binary options on an exchange in a standardized form. An embodiment of the invention generally relates to the unique use and adaptation of the five 5 -character maximum option symbology scheme, or any other adaptations of such options symbology scheme in the future, to allow for the recognition and differentiation of FROs or binary options from traditional exchange- traded options within that scheme, thus making possible the standardized trading, clearing, and settlement of FROs or binary options.
An embodiment of the invention generally relates to a specific method, uniquely applied, for calculating the closing settlement value of a security underlying a FRO or binary option, which method and application create necessary conditions for the trading of these instruments in standardized format on an organized exchange. An embodiment of the invention is a method for trading fixed return options comprising listing a FRO in standardized form on an organized exchange, and clearing and settling the FRO using the same systems used on the exchange to clear and settle standardized, non-binary options.
The method may further comprise the step of assigning symbols to the FRO that comply with the symbol conventions of standard exchange-traded options. The method may further comprise the step of processing transactions involving the FRO using existing trading, clearance, margin, and settlement systems based on the symbols assigned to the FRO. The method may further comprise the step of calculating the closing settlement value of a security underlying the FRO using a volume weighted average price NWAP of the security.
In one embodiment, the NWAP of the security may be calculated over a pre-determined amount of time on the last regular trading day prior to expiration of the FRO.
The method may further comprise the step of assigning a multiplier code for the FRO which provides information about the FRO for the systems used on the exchange to clear and settle standardized, non-binary options. Another embodiment of the invention is a system for trading a FRO, comprising an electronic order delivery and execution system in an exchange-trading environment, wherein the same electronic order delivery and execution system used to execute transactions in and deliver the FRO is used to execute transactions in and deliver standard, non-binary options.
The system may further include a means for assigning symbols to the FRO that comply with the symbol conventions of standard exchange- traded options. The system may further include a means for processing transactions involving the FRO using existing trading, clearance, margin, and settlement systems based on the symbols assigned to the FRO.
The system may further include means for calculating the closing settlement value of a security underlying the FRO using a NWAP of the security.
In one embodiment, the FRO may be traded through an on- floor auction in the trading crowd. The system may further include means for assigning symbols to the FRO that comply with the symbol conventions of standard exchange- traded options.
In one embodiment, a multiplier code for the FRO provides information about the fixed return option for the systems used on the exchange to clear and settle standardized, non-binary options. Another embodiment of the invention is a computer program product for listing FROs on an exchange, comprising instructions for assigning symbols to the FRO that comply with the symbol conventions of standard exchange-traded options.
In one embodiment, the symbols provide sufficient information for existing trading, clearance, margin, and settlement systems to process transactions involving the FRO based on the symbols assigned by the computer program product to the FRO. In one embodiment, a second computer program product computes a closing settlement value of a security underlying the FRO using a NWAP of the security.
The second computer program product may include means for inputting data from an exchange or exchanges comprising the number of shares of the underlying security and the price of the underlying security for a predetermined amount of time before market close. The computer program product may comprise an instruction for assigning a multiplier code for the FRO that provides information about the FRO for the systems used on the exchange to clear and settle standardized, non-binary options.
For simplicity and illustrative purposes, the principles of the present invention are described by referring mainly to the embodiment as intended to be employed by the Amex. However, one of ordinary skill in the art would readily recognize that the embodiments of the invention are equally applicable to, and can be implemented in, many types of organized exchange processing systems, and that any such variations do not depart from the true spirit and scope of the present invention.
Moreover, while in the following detailed description, references are made to the accompanying figures, which illustrate specific embodiments, changes may be made to the embodiments without departing from the spirit and scope of the present invention.
The following detailed description is, therefore, not to be taken in a limiting sense and the scope of the present invention is defined by the appended claims and their equivalents. An embodiment of the invention generally relates to the trading of a FRO financial product, i. In one embodiment, the performance or payoff of the FRO financial product is based on the predicted performance of an underlying security over a predetermined amount of time.
In various embodiments, the underlying security may be stock, security indexes, exchange-traded funds, bonds, commodities, or other types of financial instruments, assets or any other item of economic significance. FROs are unique compared to existing standardized options trading on national securities exchanges due to their non-linear, fixed amount payout structure.
No existing standardized option currently trading on organized exchanges has such structure. Instead, existing standardized put and call options on securities have a linear payout structure linked to the difference between the option's strike price and the value of the underlying security.
In some embodiments, the FRO financial products of the invention have three broad types or classes of products based on the predicted performance of the underlying security. First, as illustrated in Figure 5, "Finish-High" SM is a class of FRO financial products in which the writer pays a predetermined amount of cash when the settlement value of an underlying security exceeds a predetermined fixed value, i. If the settlement value is less than the strike price, the writer pays nothing On or before the purchase of the "Finish- High" FRO, the predetermined payoff value, the strike price, and the expiration date are set On or before the sale of the "Finish-Low" FRO, a predetermined payoff value, the strike price, and the expiration date are set A writer of the "Finish-Low" FRO financial product pays a predetermined amount of cash when the settlement value of an underlying security falls below the strike price on the expiration date If the settlement price of the underlying security is greater than the strike price, the writer pays nothing In this embodiment, the "Target" FRO financial product pays a fixed amount of cash when the settlement value of the underlying security is within a range of two strike prices at the expiration date.
On or before the sale of the "Target" FRO, two predetermined strike prices, a first lower strike price and a second upper strike price, are set, along with the expiration date If, on the expiration date, the settlement value of the underlying security is greater than the first strike price , and is less than the second strike price , then the writer pays the payoff price If either of those conditions is not met, however, the writer pays nothing , Such a limitation is practical to avoid creating options for which there would be very little demand because of the small likelihood that much greater price fluctuations would occur.
In one aspect of an embodiment of the invention, the OCC will issue and clear transactions in FROs as it currently does for all existing standardized options. In order to allow the FRO financial product to trade on secondary markets, one embodiment of the invention is a method for listing the FRO financial product, and having the product recognized by the various systems used currently for the listing, trading, transmitting, clearing and settling of standardized options, including those systems utilized by the OCC.
Systems used by the OCC and other parties to give proper routing and accounting treatment to particular financial products, such as systems that recognize various product types and calculate appropriate margin amounts for particular products, must be adapted to recognize the FRO instruments as separate and distinct. To that end, a mapping algorithm may be utilized to create symbols that represent the underlying security, the fact that the option is a binary option or FRO as opposed to a typical put or call option, the expiration date and the strike price, where the symbols are then listed for trading on an exchange.
In some embodiments, a computer means may be used to execute the mapping algorithm to create FRO symbols. External video Simona Weinglass on prosecuting binary options firms , Times of Israel , 3: Retrieved January 26, Journal of Business , Retrieved 17 December Federal Bureau of Investigation. Retrieved February 15, Retrieved March 15, Retrieved March 29, Retrieved March 4, Retrieved 18 May Israel's vast, amoral binary options scam exposed".
The Times of Israel. Here's how we fleece the clients". Retrieved October 24, Retrieved February 7, Retrieved 14 January Archived from the original on Retrieved 15 April Commodity Futures Trading Commission. Retrieved 20 November Retrieved June 19, Retrieved 5 September Retrieved April 26, Retrieved September 28, Retrieved 4 June Retrieved 27 March Commodities and Futures Trading Commission. Retrieved May 16, Retrieved September 24, Retrieved 21 October Isle of Man Government.
Retrieved September 20, Retrieved March 14, Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Options finance Investment Derivatives finance 2 number.