Binary Options Shorting

Binary options shorting consists of opening a contract with the expectation that the price of an underlying asset will decrease within a pre-defined period. This tutorial will cover the strategy for UK investors. We explain how binary options shorting works, the risks involved, brokers that permit the system, plus a guide to getting started.

What Is Binary Options Shorting?

A typical binary options strategy involves taking a bet on whether the price of an underlying asset, such as a stock, will increase or decrease over a period. However, investors shorting binary options will only earn a profit if the price of the asset falls.

All contracts will have an expiry date. That could be hours, days, minutes or even seconds. Essentially, traders are betting that at the expiry time, the price of the underlying security will have reduced vs the price when the position was opened.

Commodities, stocks, forex, and cryptocurrencies can all be traded through binary options shorting. Traders can speculate on the price movements of established UK stocks including AstraZeneca and BP, indices like the FTSE 100, currency pairs such as the GBP/USD, or commodities like silver and gold.

In a binary options contract, the price differential always lies between £0 and £100. Various strike prices will be offered with different fixed odds, based on the current price of the asset. The at-the-money (ATM) binary (where the market price is near the strike price) will often be priced at around £50. The higher the strike price, the greater the chance that the contract will be in the money at expiration and, therefore, the higher the cost of the contract.

Example

Below we outline how shorting binary options works in practice:

• Let’s say the current price of a share in Shell is £100 (strike price)
• The contract may ask the question; will the price of these shares be below £100 on the 12th of July at 4 PM (GMT)? (expiry date)
• Let’s say the price of the contract is £50 and an investor opens a position, assuming the price will fall
• If the trader is correct, and the share price finishes below the £100 share price at the expiry time, a profit of £50 will be achieved (£100 minus the initial £50 contract price)

Importantly, a short-selling position is typically opened by ‘borrowing’ shares in a company. Let’s say that shares in Unilever are currently priced at £80. If a trader shorts this stock, they would receive £80 from the sale of their borrowed shares. If the price of a share in Unilever now falls to £70, it would cost the trader £70 to repurchase these shares.

This leaves £10 in the account (price paid minus price sold). The margin return made on the trade is 14% (the sum of the value left in the trading account divided by the proceeds from the original sale of the borrowed shares).

Shorting Binary Options in The UK

In 2019, the Financial Conduct Authority (FCA) confirmed all firms acting in or from the UK are prohibited from selling, marketing or distributing binary options to retail customers. This is aligned with the stance of the European Securities and Markets Authority’s (ESMA) temporary restrictions on the product.

The rules stem from concerns about the transparency of risks associated with the product and the poor conduct of firms selling them. Significant consumer harm had been experienced through unexpected trading losses.

With that said, UK traders can still engage in binary options trading and shorting through offshore firms. Many reputable brokers, registered in countries such as Australia, still accept traders based in the United Kingdom.

Taxes

Shorting binary options is normally tax-free in the UK. The financial instrument is treated as a form of gambling, with just two outcomes (win or lose). Due to this, HMRC does not require a declaration of capital gains or income tax on the profits.

Benefits of Shorting Binary Options

• Short Multiple Assets – The strategy can be implemented across several asset classes. This could include speculating that the price of top companies within the FTSE 100, commodity exports from the UK, or major currency pairs including the GBP, will all fall in value due to a weakening geopolitical position.
• Easy To Understand – Due to their simple nature, shorting binary options is a straightforward strategy. The concept simply requires a price lower than the strike price to be selected and the asset to be at this price or below at the time of expiry.
• Limited Risk – Shorting binary options is a relatively transparent strategy. The best brokers will indicate the maximum profit and losses associated with each contract before you open a position. Some brands also offer the option to close a position before the expiration date to minimise losses or bank profit.
• Portfolio Diversification – You can short binary options across multiple markets to diversify your portfolio. You can hold several positions with various expiration times across forex, commodities and cryptos, for example. This can be a good way to reduce risk if price volatility occurs in one market.

Drawbacks of Shorting Binary Options

• Limited Availability For UK Investors – In 2019, the Financial Conduct Authority (FCA) introduced a ban on the sale of binary options to UK investors. With that said, British traders can still open accounts with offshore firms.
• Potential For Loss – Shorting binary options contracts is risky. Markets do not always behave as expected. With that in mind, apply risk management tools and monitor positions closely. Trading on margin can also magnify losses.
• Restricted Profit – The maximum profit associated with shorting binary options is limited given its pricing structure between £0 to £100. It might be worth having a few contracts open at the same time to increase potential rewards.

How to Get Started

Find a Broker

So how to get started with shorting binary options contracts? Firstly, you will need to find a broker that offers the product. As binary options are banned by the ESMA and the FCA, UK investors will have to turn to overseas or unregulated organisations.

Those that support short binary options trading include BinaryCent. The best brokers will provide access to educational resources, 24/7 customer service, mobile apps and flexible contracts with competitive payouts.

Study the Market

Study the market before opening a short binary options contract. Research into an asset of interest can provide pricing pattern sheets, volatility history and recent influences on price changes.

YouTube has a wealth of accessible video content on the topic of binary options shorting across various markets. Posts include how it works, getting started and how to open a position.

Open a Position

Once you feel prepared, it’s time to open a live trading account. Some brokers may have a minimum deposit requirement so bear this in mind. You can typically start trading binary options products once all KYC account verification details are submitted.

When opening a position, relevant commissions and charges will be displayed. Next, select/accept the strike price and expiration time. You may think there is an imminent price decline or have a hunch of a more steady value decrease. Make sure this is reflected in contract conditions.

Below is a quick step-by-step guide:

1. Login to your trading account
2. Pick your market, for example, the FTSE 100
3. Select duration, for example, one day
4. Select a contact/outcome, for example, will the FTSE 100 finish lower than 3152.0 at 4:15 PM (GMT)?
5. Select a price lower than the current strike price (the short position)
6. Maximum profit and losses will be displayed here (excluding any fees)
7. Wait until expiry or close out early

Keep an eye on your order via your broker’s trading terminal dashboard. Some brokers also allow you to close a position before expiration to protect profits or minimise losses. You may want to use this feature if a trade faces significant, unexpected volatility.

Bottom Line on Binary Options Shorting

Binary options shorting involves predicting that a particular asset, such as a UK-listed stock, will fall in price. It is a relatively simple strategy to understand and can help diversify portfolios. Check out our list of brokers that support binary options shorting to start trading today.

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