The Chicago Board of Options Exchange,”CBOE“, offers two binary option products. These binaries are an easy way to trade the us market based on your opinion of which direct the market will be headed over a certain period of time. They are contracts that, at expiration, pay out a pre-determined, fixed amount or nothing at all. The payout amount for CBOE binary options is $100. As with regular options, binary Options are based on an underlying security, havevarious strike prices, and different expiration dates. The CBOE lists both call and put binary options which are european-style options that can only be exercised on the expiration date. A closing price that is in-the-money prior to expiration does not trigger the maximum payout.
The binaries also expire and settle on the same dates as the standard option on the same underlying index. So for example if, at expiration, the price of the underlying security closes at or above your selected strike price, the trader of a call binary option receives $100 per contract. If the underlying index closes at a price that is below the strike price on the expiration date, the option’s trader receives nothing. With put binary options, the trader receives $100 per contract if the underlying index closes below the strike price at expiration, but $0 payout if the underlying index closes at or above the strike price at expiration. The strike prices are initially, in-, at- and out-of-the-money strike prices with new strikes may added as the underlying index moves up or down or upon request.The minimum interval is 5 points. Just like regular options, a binary position may be liquidated (bought or sold to close) prior to expiration. The price of a call binary option traded at the CBOE should reflect the perceived probability that the underlying index will reach or exceed the index strike price, or with put binaries will fail to reach or exceed the selected strike price at expiration. The cost of binaries will normally be quoted at a price quote in pennies, between zero and $1, and the $1 equals $100 per contract. Buyers of binaries pay for the contract at the time of purchase. For the usual trader, binaries must be paid for in full. However , the CBOE will allow a margin of 75% for bianries which maturing greater than 9 months out.
The CBOE presently offers binary options on the S&P 500 Index (SPX), ticker symbol BSZ, and the CBOE Volatility Index (VIX), ticker symbol BVZ. The expiration dates and settlement values are the same as for traditional options. Like standard options, the last trading day for SPX binaries usually will be the Thursday before the third Friday of the expiration month. Settlement of BSZ options are morning A.M. settled. The settlement value is calculated using opening prices, usually on the third Friday of the expiration month. The exercise-settlement value will be the same as the settlement value (“SET”) for S&P 500 Index (SPX) options. The BSZ binary options expire on the Saturday following the third Friday of the expiration month. With the VIX index, the binaries BVZ will, like VIX standard options, stop trading usually on the Tuesday before the expiration date of each month. BVZ options are also morning A.M. settled. The settlement value is calculated using opening prices, usually on Wednesdays that are 30 days prior to the next month’s third Friday. The settlement value will be the same as the e-settlement value (“VRO”) for CBOE “VIX” options. The actual expiration of BVZ options usually will be the Wednesday that is 30 days prior to the third Friday of the following month.
These CBOE binary options are cleared through the Options Clearing Corporation (OCC) and can be traded in a regular securities account with American brokers or any other international securities broker that is approved to trade American options. The trading hours on the exchange are from 8:30 a.m. to 15:15 Chicago USA Central Time zone. The CBOE has established position limits of 1,500,000 contracts on the same side of the market.
Here is an example of a trading strategies:
You, the trader, think the S&P 500 Index will be at or above 1500 by the third week of February 2013. You think that within the next few weeks it will continue trading up. The S&P 500 Index is approximately 1400. Purchasing one February 1475 Binary (BSZ) contract for .38 (cost of $38), speculating that the S&P 500 Index will be at or above 1500 by February 15th. If you are correct, you will receive $100, realizing a $62 profit ($62 = $100 less $38 paid up front).Also maybe you will be lucky sooner, and the February 1475 binary contract increases in value to .73 ($73) in January, so you decide to sell your contract earlier and pocket just a .35 ($35) profit ($35 = $73 less $38 paid up front). One the other hand, if you could hold on to your contract until the expiration date (usually the third Friday of the month for BSZ) and receive $100 cash payout if the S&P 500 Index settlement price is at or above 1475. However, you will receive nothing and have a net loss of $38 if the S&P 500 Index settles at a value less than 1475.
Remember that binary contracts can be bought or sold to open. If you have a portfolio of stocks, you might consider selling BSZ options and collecting the premium to enhance returns. This is a possible alternative to the traditional “buywrite” strategy of selling SPX options, where the upside profit potential is capped at the strike price. Because CBOE Binary contracts have a maximum payout of $100, your maximum loss on the short BSZ Binary is limited to $100 too.