CBOE Binary Options
Thinly Traded Options
CBOE binary options are very thinly traded. These options, like any options, should only be bought or sold after careful consideration. Options and binary options are speculative instruments and not suitable for long term investment portfolios. This information is for educational purposes and is not a suggestion to buy or sell binary options.
What Are CBOE Binary Options
The Chicago Board of Options Exchange began offering U.S. regulated exchanged listed binary options in 2008. This was made possible by a change in how the CFTC and SEC viewed binary trading. At this time CBOE and NADEX binary options are the only U.S. regulated binary options. These options can be traded in any account that is approved for options trading, providing the broker chooses to list them. There are still quite a few that do not yet list CBOE binary options.
- Binary Options - Are a fixed return trading vehicle with only two possible outcomes, usually all or nothing. Binary options are based on an underlying asset just like equity options and are considered in-the-money if one simple condition is met. If the underlying assets closes above the chosen strike (for bullish traders, bearish trades can also be made using puts) then the option closes in the money and pays out the maximum return. If the underlying fails to close in the manner predicted by the option the options closes out of the money and pay nothing.
CBOE Binary Options
The Difference In Binary Options
There are many differences between binary and standard equity options. First is the payout structure. Binary options pay all or nothing. Standard options can pay nothing, or an unlimited amount or some amount in between. The value of binary options is predetermined and unaffected by all market factors except one; the price of the underlying asset. The value of standard equity options is yet-to-be-determined and is influenced by a long list of factors including delta, theta and vega. These factors make it nearly impossible for the average person to profit from trading options. With binary options if the underlying asset closes in the money the option closes in the money. With equity options it is possible for the underlying asset to close in the money and for the option to lose money, that is not possible with binary option trading.
Chart Of BSZ, The CBOE SPX Binary Option
CBOE Binary Option BSZ
The CBOE binary option BSZ is a great way for American binary traders to speculate the S&P 500. The option symbol closely mimics the S&P 500 and the SPX as you can see from the pictures to the right. The closing price for SPX on Friday, 2/21/2013 was 1515.60, the same as the closing price of BSZ. This option moves in tandem with the underlying index each day and is accessible during standard market hours, 9:30AM to 4:15PM eastern time.
Picture Of BSZ Quote Detail
Binary Options, Margin Accounts and The Pattern Day Trader Rule
One of the many advantages of trading binary is cash settlement. All transactions are completely transparent and cash settled. That means there is no need for margin accounts and no need for the Pattern Day Trader Rule. All long positions are purchased with cash, just like any other long position in stocks or options. The potential profit is the the difference between the purchase price and $100. This mean there is potential for huge profits, imagine buying an option for $5 and selling it for $100. Short positions are a little different. When you sell a CBOE binary option you receive the sale amount. The cash obligation is the difference between the sale price and $100. This is the only cash requirement of the trade. For example, you sell BSZ for $45 per lot. If the option expires out of the money you will keep the $45 and have no obligation. However, if the option expires in the money you will be obligated to pay the buyer $65, the difference between the sale price and $100. From this perspective it is desirable to be a seller of CBOE binary options. If you sell an option for $51 you can only profit because your obligation will be $49, $2 less than the sell price.
Features Of CBOE Binary Option BSZ
- Based on the underlying index future SPX (S&P 500). Is equal to and moves in conjunction with.
- Each option lot is worth $100. Profits are equal to the difference between the contract obligation and $100.
- Strikes are listed with an interval of 5 points. Price per strike fluctuates with the movement of the underlying index.
- Bid and Ask spreads are listed in amounts ranging from $0.00 to $1.00. This is per share, contracts are traded in lots of 100. The actual price of 1 lot of BSZ at $0.54 is $54.00.
- All contracts expire on the third Friday of the contract month. This is the same as all other U.S. regulated options and futures contracts.
- Options expire European style, but this is where it can get confusing. These options are also tradable and can be closed by selling an offsetting position. The profit or loss is determined by the difference in opening and closing prices.
- At settlement all options are either worth $0 or $100. In the money options profit, out of the money options lose. Amount of profit is the difference between $100 and the cost of owning the option.
How Are CBOE Binary Options Priced
Pricing is one feature of U.S. regulated binary options that differs from the growing European binary options industry. CBOE and NADEX binary options are always worth $100 if they close in the money and $0 if they close out of the money. The price of the options will be in the range of $1 and $100 up until expiration time. This price will fluctuate during the life of the option in tandem with the movement of the underlying asset. Open market access (OPM) and the availability of bid/ask spreads is what makes CBOE and NADEX options tradable. These options can be bought and sold prior to expiration for market price. Otherwise, CBOE binary options expire European style. The amount of profit or loss is determined by subtracting the cost of ownership from $100. For example, you buy a call on BVZ for a close above 12.50. The call costs $45 to purchase and the VIX closes as expected on expiration day. Your profits on the trade will be $100 (value at expiration) - $45 (cost of purchasing the position) = $65.
- European Style Binary Option Expiration - Contracts can only be exercised or assigned at expiration day. The closing price on expiration day is the only price that matters. If contracts are in the money they profit and if they are out of the money they lose.
BVZ Is A U.S. Regulated Binary Option
CBOE Binary Option On The VIX
BVZ is one of the first binary options I ever learned about. It is the Chicago Board Of Trade's binary option on the VIX. The VIX is a tough trade in ordinary circumstances because of how many factors go into its value. Not only is there the price of options, influenced by volatility and implied volatility, there is also the price of the index itself to consider. These two factors keep many options traders away from the VIX, which leads to wide bid/ask spreads and other perils for those who do choose to trade it. The BVZ takes most of that out of the equation. It is still a tricky trade but it is much easier with binary options. The BVZ is a good way to trade this market because it mimics the VIZ so closely. If you put up one chart of each they will look nearly identical.
BVZ Binary Option Mimics The VIX
Features Of CBOE Binary Option BVZ
- Based on the underlying index, VIX. This is the Chicago Board Of Options Exchange S&P 500 volatility index. It is a measure of the relationship between the price of the S&P and the price of S&P 500 index options.
- Strike prices are listed with an interval of one point. The price of each option will fluctuate with the value of the VIX.
- Bid and Ask spreads are listed in increments between $0.00 and $1.00, just like with BSZ. Price of each option will be between $0.00 and $100. Each lot represents 100 shares of stock.
- All contracts will expire on the third Friday of each month. This is also the same as standard equity, forex and futures options. The CBOE website has a really confusing definition of expiration time but it
- Options expire European style with out of the money contracts returning $0 and in the money contracts returning $100. Profits and losses are determined by subtracting the cost of ownership from $100.
Katya on September 11, 2014:
Good article. Thank you very much indeed.