are binary options just vertical spreads for dummies?

O

OTCkrak

In finance theory the pricing of a binary should trade at parity to an equivalent structured trade.

I haven't looked at the calculations behind it but i would guess that the binary "bets" offered by brokers like NANEX have a larger spread than setting up the same trade idea using regular options. i would also guess that excluding fees/commissions.. there is possibly even an arb opportunity trading between the two, which is how Nanex makes money.

My point is that Nanex takes advantage of misinformed novice traders and offers a structured trade that is wayy to expensive.

what do you think>
 
The trades are similar but they are not the same. They make their money just like every other market maker, they sell the binaries above fair value and buy em below. No different then a market maker in AAPL options.
 
Digitals? Yes, a discrete vanilla vertical. There are some advantages to be had OTC; discrete durations, strikes, etc.
 
How do you do a synthetic binary using vanilla options? You can't? How is it possible to replicate the payout structure? Binaries are fixed gain/loss of a sizable payout and all or nothing. Even vertical spreads have variable profit/loss regime depending on where the price hits. Also, you can get binaries that are outside of vanilla expiration dates, so you can't replicate the expiration cycle of binaries either using vanilla options to make a synthetic.
 
You must log in or register to reply here.
Back
Top