Binary Events in the Market Abound

by Darwin on July 30, 2016

I know hindsight’s 20/20 but I continue to find myself watching binary events in the market and regretting missing the great opportunities that have presented themselves.  Unless you’ve been living in a cave, surely you noticed the major news surrounding the succession of the UK from the European Union otherwise known as Brexit.  While some have painted this as a xenophobic immigration issue, it also represents general frustration over control and constraints coming out of Brussels which many Brits feel was choking off their economy and prospects.  Nevertheless, the elites and pundits were all calling for a possibly close but highly likely outcome for the “Remain” option. And that’s not what happened.  For those that placed bets on exiting, they made a killing.  And interestingly, aside from treating this as a speculative wager, many people could have even used this as a hedge.  For instance, say you had a lot of money tied up in the FTSE 100 or in the British Pound currency… you could have placed a small wager on “Exit” which would pay off to offset losses in your other positions.  This is just one of many ways that playing a binary event could not only deliver profit, but stave off disaster.

Binary Event Options from Takeovers

I happened to be watching a major acquisition for some time.  I figured it would eventually go through and be approved, but there’s always a slight discount to market value leading up to trade commission approval in the event the deal falls through (Remember Pfizer/Astra Zeneca? – the government killed that deal with a tax inversion rule).  Anyway, that’s another situation where small wagers can be placed on something you already have a relatively good feel about.  The arbitrage market makes money off these small possibilities and so can you.

Elections – there’s a big one coming!

Surely, you’re watching the Trump/Hillary battle brewing in the US.  The elites and smart money remains on Hillary Clinton winning the general election, but Donald Trump has been rising in the polls.  This is another event that has virtually 2 outcomes (third party candidates never garner more than 10% of the vote and very few electoral votes, if any).  So, if you were say, hedging against a major stock market decline (which is likely to happen if the underdog Trump wins), you might want to play the binary event outcome of Trump winning.

Hedging Your Own Gas Prices

This is one play I like to do on a recurring basis in my personal life.  There are various ways to do this with anything from binary options to futures to shorting ETFs.  But long story short, everyone with a car has to shell out a fair amount of money each year for gas.  By hedging the prices on something you’re forced to pay for anyway, you win (or hedge) no matter what happens.  If gas prices continue to go up (here’s a price heat map) and you bet on a price rise, at least you capture some of that increase back.  If prices drop, while you would lose money on your newly placed position, you’ll also be realizing lower costs at the pump.  If airline and trucking companies do this as a routine order of business, why shouldn’t consumers?  You can!

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