USFE Binary Options

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The US Futures Exchange has delayed plans to offer binary event contracts based on price movements in five asset classes - gold, silver, oil, gasoline and the euro/US dollar exchange rate - but is continuing to develop its event-driven complex.

Background

The USFE conceived a suite of binary options to tap the growing demand from retail investors for event-driven products offering speculative plays ranging from movements in financial indexes and individual assets to the outcome of sporting and political contests.

The market had spawned a range of unregulated online entities, many of them focused on sports events, while others such as Dublin-based Intrade had expanded to include products based on financial indexes.

The USFE believed the uncertain regulatory and legal environment surrounding such products, particularly in the US, offered the opportunity for products traded and cleared on a regulated US derivatives exchange.

The exchange had toyed with “consumer-friendly” products on events such as the outcome of American Idol – the popular US television talent contest [1], but focused on event with an underlying “economic consequence”.

Products

The USFE launched its first product[2] on April 20 2007 with two binary options contracts based on the outcome of the three-way contest for control of the Chicago Board of Trade between the Chicago Mercantile Exchange and the Intercontinental Exchange. (CBOT shareholders voted in favor of a merger with the CME on July 9, 2007).

Binary options in five single-asset classes were due to be launched on October 15, 2007[3] covering gold, silver, oil, gasoline and the euro/US dollar exchange rate. However, the products are being reconfigured, with no current launch date.

The framework envisaged a contract open on Monday morning and close on Friday afternoon, with nine contracts offering strike prices at even intervals above and below the previous week’s close.

Contracts quoted between 0 and 100, representing the implied probability that the contract will finish the week in-the-money at 100 points. Final prices equal or below the strike price at the end of the week are out of the money at 0 points. Contracts are worth $10 per point, resulting in a potential settlement value of $1,000.

Trading hours: 22 hours from 6pm to 4pm Chicago time

Specifications

Asset Reference price

Gold Comex Silver Comex Oil NYMEX WTI crude Gasoline NYMEX gasoline Euro/US Dollar Noon Fed buying rate

References

  1. Remarks by Ira Polk, USFE board member, at FIA Expo, November 2006
  2. Press release. US Futures Exchange.
  3. Press release. US Futures Exchange.