Financial betting

Financial betting refers to the wagering on the price development of a financial instrument at some later date relative to the current price or level of the instrument, against odds offered by a bookmaker. Maximum potential pay-off of the wager is known when the bet is taken and as a corollary risk is known beforehand by being limited to the initial stake.

Financial betting instruments are a type of digital option. The outcome of the wager at settlement is binary, that is, either a win or a loss. Settlement is executed in cash and there is no delivery of the underlying asset. At any point in time prior to the settlement date bets can often be sold, allowing for possibilities to bet on the accuracy of a market move within the fixed limits of zero win (loss of the stake) and maximum potential win. A fee might sometimes be charged for this service.

The main difference between financial betting and speculation on financial markets using products such as financial spread betting is that the bet must result in a simple binary win or loss based on an event on the underlying financial instruments. This triggers a fixed payout for a win, while with spread betting the payout or loss varies with the price level of the underlying instrument.

Odds have to be consistent with the real-time pricing of the underlying financial instruments listed on foreign exchange markets or securities exchanges in order to avoid arbitrage opportunities (although this might not be possible because of limitations on shorting, i.e. laying bets). Calculation of the odds therefore draws on the Black–Scholes formula for pricing options. Using some variation of the model to solve for volatility, from observed market prices of traded options, gives implied volatility. Implied volatility is forward looking, that is, it can be used to estimate the odds for future price movements using mathematical algorithms.

There are three main variations of financial betting. These vary mainly in the way odds are displayed.

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