Papale on Binaries

Don’t get stung by a scorpion.  I used to live in the west and there was the occasional scorpion and black widow.  I read the other day how a lady got stung by a scorpion and was taken to the emergency room.  She was given two doses of anti-venom and sent home.  The real shock came when she got the bill for the anti-venom – $40k per dose!  Ouch.  Apparently insurance picked up some but she’s on the hook for the rest.  Maybe if the options markets ever dry up I’ll go into the scorpion anti-venom business.

I was asked to attend an industry meeting earlier in the week to give feedback on some new products potentially coming to market sometime down the road.  One of the products talked about were centered around binary options.  Binary options are not new.  They are traded on various exchanges including the CBOE.  Basically, a binary option has a payoff that is all or none.

For example, if XYZ closes above 100 on Friday at 10 am central time, the binary will pay $1000, if not it is worth 0.  Binary options, like standard listed options, have bids and offers and trade leading up to expiration.  They are similar to normal options in that if they finish out of the money they are worthless.  However, in our example, if XYZ goes to 200, the binary still only pays out $1000.  There are only two outcomes – $1000 or 0.

And what is also interesting is the availability of binaries with hourly expirations on several different products.  The idea is apparently that managers can use these hourly binaries to hedge underlying positions or even other more traditional hedges if so desired.  As I was sitting there, I could not help but think about the roulette wheel at the casino.  The idea of an hourly binary with an all or none payout seems, for the retail investor at least, more like a gamble than a hedge.  Point is though, the landscape for derivatives and specifically options continues to develop.  New products come and go.  But proven long term strategies and risk management will be around a long time.

Steve Papale is a mentor with DiscoverOptions, the educational arm of OptionVue Systems.  Inquiries should call 847-816-6610 or email info@DiscoverOptions.com.

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