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Binary Options AFSL Application

Binary Options - often referred to as digital or fixed return options, are a simplified method of trading the financial markets. They retain the characteristic of a Contract for Difference with a determination of whether the price of a financial asset will be below or above the current price.

Anyone who offers a facility for trading Binary Options in Australia will be required to hold an Australian Financial Services Licence (AFSL).

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What are Binary Options?

Binary Options reference financial assets such as shares, currencies or commodities and relate to whether the price will close ABOVE or BELOW the current market price within a set time period. If the price prediction is correct, the trader wins the trade and earns the payout established for that particular asset and time period calculated as a payout figure.  If the prediction is incorrect, the option ends at a zero valuation and the trader loses the amount they placed.

During the trading period, Binary Options are always priced somewhere between zero points and 100 points. If an outcome is highly likely to occur, you might need to pay 90 points or more for the option. If an outcome is very unlikely to occur, the option might only cost 10 points or less.

As with all options, the valuation of a binary option will change as it approaches its expiry.

Binary Options were designed as investors strove for an innovative and simple way to trade options across the financial markets. This became reality with the technological advances over the last five years that allow the general investor greater access to the financial markets. Binary Options are a cross between traditional buy-and-sell options and those of fixed returns. The simplicity of the Binary Options is that there can only be one of two outcomes either the price is above or below the current price.

Regulatory Requirements

Generally, any trader or market maker that engages in trading Binary Options will be required to hold an Australian Financial Services Licence (AFSL).  This will require a derivatives (and also possibly a foreign exchange) authorisation. This means that in the case of offering market maker services offering Binary Options over shares, foreign exchange, commodities.

The following authorisations will be required:

  • provide general financial product advice for the following classes of financial products:
    • derivatives; and
    • foreign exchange contracts;
  • deal in a financial product by:
    • issuing, applying for, acquiring, varying or disposing of a financial product in respect of the following classes of financial products:
      • derivatives; and
      • foreign exchange contracts; and
  • make a market for the following financial  products:
    • foreign exchange contracts; and
    • derivatives;

to either retail or/and wholesale clients.

Documentation Requirements

Existing AFSL holders:

The ordinary documentation that AFSL holders are required to provide their clients, (such as Financial Services Guides) still stands.

In addition, existing AFSL holders wishing to offer Binary Options as an additional product should review the following documents:

  • Product Disclosure Statement (PDS) – under a separate heading in the PDS, make provisions for the terms and conditions on which the Binary Options are offered.
  • Client Agreement (Terms and Conditions) – Although Binary Options are Contracts For Difference (CFDs) by nature, they have different terms and conditions and should be offered under those terms rather than standard CFD terms.  This will involve issuing a new Client Agreement for a Binary Options product.
New AFSL Applicants:

AFSL holders wishing to offer Binary Options will need to prepare the following documents for provision to clients under the Australian regulatory regime:

  • Financial Services Guide (FSG) – an introductory document which provides clients with information about your firm as required by ASIC guidelines.
  • Product Disclosure Statement (PDS) – a detailed description of the product you are offering covering all of the information specified by ASIC which product providers need to give to clients before an issuance is undertaken.
  • Client Agreement (Terms and Conditions) – Contractual terms on which you will engage with the client.

Advantages and Disadvantages of Binary Options

There are many advantages and some disadvantages associated with Binary Options.

ADVANTAGES OF BINARY OPTIONS

  • No risk of being stopped out (via a stop-loss order)
  • Controlled Risk – The percentage reward is known from the outset, as is what the investor stands to lose i.e. the exact amount they placed.  In ordinary trading, a gap in the market or missed stop loss can leave exposures to a much greater than expected loss.
  • Easier, simpler – The investor only needs a sense of direction i.e. ‘Will the exchange rate increase/decrease in half an hour?’
  • “In the money” – For a profitable trade to take place there is a need for price to close in-the-money, a winning trade will receive the entire payoff, even if was ‘right’ by a single tick.
  • Protection – An easily manageable option to take if a trader has an open position elsewhere in currency, stocks etc. Utilising a Binary Option can potentially eliminate a further loss elsewhere.
  • Punctuality – Binary contracts are being issued around the clock, allowing traders to trade on multiple time frames. There is always an expiration time arriving, which constantly yields new opportunities for binary traders.
  • High level of leverage
  • Very short time frames.  Some binary options open and expire within five minutes and a large number of binary options only take a day to expire.
  • Allow traders to take positions that are low risk yet carry very high potential return.

DISADVANTAGES OF BINARY OPTIONS

  • Large transaction costs.
  • Spreads tend to be very wide which is passed onto the costs of entering in and out of trades.
  • The pricing in binary options markets are not transparent and can mean that clients are overcharged for their underlying exposure.

Binary Options Example

If an investor or trader were to speculate that the price of gold would increase from its current price at $1712.71, in the next trading session of one hour he would fix the time and the fact that the price would increase above $1712.71. At the expiry of the hour period, he would be deemed to be successful if the price dropped below the price level and earn based on the amount of contracts the investor purchased.

The contracts are generally priced at a 100 and the profit or loss is calculated at the difference between 100 (if the event occurs) or zero (if the event doesn’t occur) and the level of which the investor ‘bought’ or ‘sold.

Meaning, if the investor opts to buy the gold futures contract and set it above $1712.71 at 1:30 pm and selects 10 contracts at the offer price (assuming the offer price is $21.00), each contract is worth $1.00 per point. The most the investor can make is $790.00 and the most the investor can lose is $210.00.

If you would like further information or assistance in regards to Binary Options, please contact Sophie Grace directly.