Discussion in 'Options' started by noob_trad3r, Jul 19, 2010.
How do these work, I cannot seem to find a proper explanation.
I just posted this on a discussion in the Journal's forum.
Binary options are traded on the SPX and the VIX (BSZ and BVZ) at the CBOE. They settle at either 1 or 0 depending whether they are in the money or not. For example if you were to buy the Aug 1000 BSZ call for .84, you would either make .16 if the index settled above 1000 or lose .84 if it settled below 1000. This is essentially the same thing as selling the 1000,1010 put spread in the SPX, (although you have a bit less risk as with the put spread it will be in the money below 1010.)
Note in the BSZ, you must trade 10 binary contracts to equal 1 SPX put spread. In the BVZ 1 binary equals 1 spread in the VIX.
This sounds like the only one who will end up making money in the long run is the person who sells these options.
Separate names with a comma.