Binary Options Arbitrage
Binary options arbitrage is a trading strategy that aims to capitalise on price discrepancies within different markets. It is considered a relatively low-risk technique due to its simplicity and how both positions are covered. This guide will explain what binary options arbitrage is, the pros and cons, plus how to get started. We’ve also listed the best brokers below.
What Is Binary Options Arbitrage?
Binary options allow you to trade based on two possible outcomes: yes or no. Traders predict the price movement of an asset, such as Tesla stock, and set an expiry time. The price at the expiry will determine whether the trader is ‘in the money’ or ‘out of the money’. Traders can choose from several styles of binary options, including high/low, touch/no-touch and boundary options.
Arbitrage involves executing simultaneous trades with the aim of benefiting from an asset’s price difference on two different exchanges.
An example of this would be if a company is listed on both the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE) at prices of £5 and $8, respectively. If we assume the exchange rate of $1 = £0.74, there is a difference of £0.92 in value. To capitalise on this discrepancy, you would purchase shares on the LSE and immediately sell them on the NYSE, earning a profit of £0.92.
While this is a small amount, making regular and frequent trades with a greater volume can help to gain larger revenues. This basic example utilised stocks, however, arbitrage is a strategy you can use for many instruments including forex, cryptocurrencies, commodities and, importantly, binary options.
How It Works
Arbitrage with binary options involves making both a ‘call’ and a ‘put’ on the same asset. This means that upon expiration, one of your two positions will always be ‘in the money’. In order to make a net profit from this strategy, you will need to find a trade with a payout greater than 100%.
If you just make binary options trades where you earn a profit of $100, but you have invested $200 across the two positions, you will not yield any net profit. In fact, you will likely make a loss when you account for the fees. Because of this, you want to look for highly volatile assets that are more likely to have greater payouts for either option at different brokerages.
It can be difficult to find suitable opportunities for binary options arbitrage due to these specific conditions required. It is also important that when you make this trade that both positions expire at the same time, otherwise you are not completely covered. For example, if one position expires five minutes after the first, the asset’s price could fluctuate, such that neither is ‘in the money’.
Unlike arbitrage with other instruments, binary options do not require you to trade on separate exchanges where you may need to consider currency exchange rates. Rather, you are looking for irregularities across different brokers. For this, you will want to find two brokers where one offers greater returns for going high while the other offers better rewards for going low.
As these discrepancies are rare and often corrected quickly, it may be helpful to have an account with a number of brokers offering binary options, such as Pocket Option and Quotex. This will allow you to quickly take advantage of the opportunity before it is remedied.
When searching for assets with binary options arbitrage, it can be difficult to find potential trading opportunities that satisfy the specific criteria. You are essentially reliant on the market operating inefficiently, which is rare. To help identify these opportunities, you will need to monitor the news for announcements that could seriously impact an asset’s value.
Fortunately, impactful news is publicised outside a stock exchange’s trading hours, which can lead to wild speculation over an asset’s price at market opening. Binary options do not operate on any single centralised market and so it is possible to execute trades around the clock, meaning you can take advantage of this speculation.
There are also opportunities with assets that are linked together. A prime example of this is the inverse relationship between the Japanese Yen (JPY) and the price of oil. As Japan imports a lot of oil, JPY sometimes increases following a decrease in oil price. Connections such as these offer exciting binary options arbitrage trades, however, they are riskier as you are reliant on a correlation continuing.
Pros Of Binary Options Arbitrage
Traders looking to use binary options arbitrage techniques enjoy multiple benefits:
- Fast-paced, dynamic trading experience
- Potential to use algorithms to identify suitable assets
- Lower risk strategy where any losses are covered as you are hedging your bets
Cons Of Binary Options Arbitrage
However, there are some notable drawbacks:
- Trading fees can easily cut into profits and could lead to losses
- Net profit can often be small due to the offsetting of the loss for the ‘losing’ side of the trade
- You need to be fast to make a trade when you identify an opportunity, as market imperfections are quickly corrected
Binary options arbitrage is a good strategy with potential for low-risk trades. Opportunities are rare, however, so you need to conduct plenty of research into how these trades work to learn what information you are seeking when identifying assets. Use our list of brokers to get started.
Is Binary Options Arbitrage Legal?
Yes, the binary options arbitrage strategy is legal. It is important to note, however, that binary options trading is not permitted in some countries. Check your local jurisdiction’s rules before trading.
What Is Arbitrage?
For binary options, arbitrage means you make trades covering both positions. For example, you make trades for an asset’s price being both inside and outside a price range at a given expiration time.
What Types Of Binary Options Are Available For Arbitrage?
You can use arbitrage on all types of binary options. This includes high/low trades, range/boundary, touch/no-touch and ladder trading. As such, arbitrage can be an appealing strategy for those who wish to diversify their options trades.
Can I Make Binary Options Trades In The USA?
The Commodity Futures Trading Commission (CFTC) says that US-based retail traders may execute binary options trades but they must use regulated exchanges. Make sure to thoroughly research your chosen brokers and check for correct licensing documents.
Can I Use Bots To Identify Binary Options Arbitrage Opportunities?
Yes, algorithms are a great aid for scouring the markets for arbitrage opportunities. It can be difficult to find arbitrage opportunities as they are so uncommon and so having a robot conduct the search on your behalf can speed up the process.