Why There Are Differences in Prices for Binary Options

Many in the binary options field don’t explain this aspect of trading binaries and most brokers don’t bother telling whole truth. So here’s the whole story without pulling any punches. For starters, no matter who you are trading with, regulated or not, the broker you choose will also be pricing the options as a market maker. It is important to note than when describing binary options brokers we are referring to the OTC (over the counter) market and not exchange traded binary options as those are rarely traded by retail traders if ever.

So when discussing binary options sold to you by a market maker, you know you need to be on your guard but not due to anything nefarious by the broker. Rather, a trader should always be alert as price differentials can occur. When a trader watches his trading screen he should also keep a screen open with neutral charts of executable prices. Although, as will be explained below, the 2 prices don’t have to be equal, they should be running in parallel.

What this means is the if a trader sees that the EUR/USD is currently being offered for Up and Down options at the price of 1.31458 but a forex broker is offering a “middle price” for the same forex pair at 1.31454, the price at the binary broker is in fact 0.4 pips higher than currently available at the forex broker.

First lets dispel the misconceptions In this regard. There is no way to know where the middle price really is at the forex broker unless you are using am ECN and even then it’s difficult at best. The reason is that the middle price is derived and no quoted. So the binary broker is providing what it thinks is the middle price where in fact that price might actually be closer to the actual bid or ask quoted by your forex broker. Again, nothing is wrong with this on any level. The reason is that the binary broker is supplementing the actual underlying asset’s price with supply and demand as well as options’ “greeks”. So when you see a price, you are seeing 3 factors:

  1. The actual price in the market
  2. The supply and demand for that option as it relates to the broker’s own “book”
  3. The Greeks and more importantly the volatility factors

So these factors can cause obvious and sometimes less obvious differences between the price you see in a charting software or even your forex broker to what you see on screen. Does that mean you shouldn’t keep a charting package running parallel to your binary options trading screen? The answer is simply, absolutely not. You should always have another source of information running so you can compare and make sure that things are running close. If the difference is too big and you too want to trade in the direction of that differential, you will be severely disadvantaged trading. So either be willing to go with an option running the other way – or sit on the sidelines.

Expiries on the other hand are easier to contend with as they are guaranteed prices based 100% on what you see at your forex broker. So although there still might be slight differences, these are usually much harder to distinguish between and rarely cause any problems to the trader. At least this is the case with brokers using software that guarantees a bid-ask / 2 model.

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