Calculating Breakeven Ratios & Profit Margins in Binary Options

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Calculating the Breakeven Ratio and Profit Margin in Binary Options

Updated on: 6 January 2020

Some of the most important things one will have to understand in binary options trading are the notions of breakeven ratio and profit margin. The breakeven ratio is the percentage of accurate trades one will have to execute in order to make profits.

The profit margin is the difference between the breakeven rate and the ratio of accurate trades executed by traders. This is the percentage that denotes the pure profits traders are making.

These are also one of the notions that most commonly are never mentioned by binary options brokers and as such, the overwhelming majority of people do not even have an idea about. But like explained, you can only know if you’re making profits in binary options if you understand what these ratios are.

The breakeven ratio in binary options trading exists because in binary options you will be paid out if you predict the outcome of the movement of certain assets. The payout however will most commonly never be 100%, meaning that even if you get 50% of your picks right and 50% wrong, you will actually lose money.

The formula to calculate the breakeven ratio is the following:

Where B stands for breakeven ratio, I for in the money ratio and Ot for out of the money ratio.

The profit margin is the difference between your winning ratio and the breakeven ratio. The formula to calculate this is:

Where W stands for winning ratio.

If you don’t know what these ratios mean, then please continue to read this article. Everything is explained below in detail.

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What is the Break Even Ratio?

The breakeven rate is the percentage of the accurate predictions you will have to make in order not to lose any money. If your percentage of accurate predictions coincides with the breakeven ratio, then you will not lose money but you will also not make any money at all.

As you know, in binary options you will be making money if you predict the future movement of an asset. In order to be able to make a prediction, you will have to invest a certain sum of money.

If you make a correct prediction, you will be paid out with the repayment of the investment plus a % of that investment. In most cases this percentage is never 100%. This means that correctly predicting 50% of your predictions will not mean that you will break even.

In order to break even (not lose anything but also not win anything) you will have to have a breakeven percentage of above 50%. Most traders do not even have a clue that this rate even exists. Brokers usually don’t say anything whatsoever about it either.

How to calculate the breakeven ratio?

But fortunately it is not so hard to calculate this rate. The only things you will have to know about are a few parameters. These parameters are the “In the money ratio” and the “Out of the money ratio”. Using these, you will be able to easily calculate the breakeven ratio.

In the money percentage

The in the money rate is the ratio of the profits you will be making in case you make an accurate prediction. In other words, the in the money percentage is basically the payout percentage offered by brokers.

A payout percentage of 80%, for example, means that in case you make an accurate prediction, the broker will repay your investment and offer you a commission of 80% of the investment amount.

Out of the money percentage

The out of the money ratio is the percentage of your investment the broker will take away in case you do not make an accurate prediction. In most cases, when you make an inaccurate prediction the broker will take away all the money you have invested. In this case, the out of the money percentage is 100%.

However, some brokers also offer so-called rebates. Rebates basically represent the percentage of your investment the broker will not take away in case of an inaccurate prediction. Most common rebates range between 5% to 15%.

So, if a broker offers rebates of 15% on losing trades, then your out of the money ratio is 85%.

Breakeven Ratio Formula

The formula to calculate the breakeven percentage is the following:

B – Breakeven ratio

I – In the money ratio

Ot – Out of the money ratio

In order to better understand these, let’s look at a few examples that involve the breakeven rate.

Let’s suppose that the broker offers a payout rate of 80%, meaning that the in the money ratio (I) is 80%. The broker does not offer any kind of rebates at all, meaning that the out of the money ratio is 100% (the broker will take away all loses).

In this case, you can calculate the B the following way:

B = 100% / (100% + 80%)

Let’s remove the percentages for the calculation’s sake:

B = 100 / (100 + 80)

Now let’s add back the percentages:

And this brings us to:

What this means is that in the case of a payout rate of 80% and 0% rebates you will have to accurately predict 55,55% of your investments in order not to lose any money at all.

Example with rebate

Let’s take an example of a rebate now. Let’s continue to use a payout rate of 80%, as in, an in the money ratio (I) of 80%. Now, imagine that a broker offers a rebate of 10%. In this case, the out of the money ratio (Ot) is 100% -minus the rebate, which in this case is 10%, so the Ot is 90%.

Let’s skip the math’s part now. You can calculate this yourself with a pocket calculator:

So, as you can see, in this case you will only have to accurately predict 52.91% of your trades in order not to lose any money at all. Choosing a broker that offers a rebate is extremely rewarding as you can see.

Example with boundary option

A limited number of binary options such as boundary options, 60 seconds options and one-touch options offer payout rates of above 100%. What this means is that in these cases your breakeven ratio may as well be below 50%.

However, it’s much more difficult to predict the outcome of these kinds of options and your winning percentage will usually be below 50% even in case you just make random bets without any strategy.

So let’s imagine that a broker offers a payout rate of 200%, meaning that the in the money percentage is 200%. The broker does not offer any rebates, so the out of the money ratio is 100%. Based on this, the breakeven rate is as follows:

B = 100% / (100% + 200%)

What this means is that in order for you not to lose any money at all you will have to correctly predict 33,33% of all the investments you have made.

Calculating Binary Options Profit Rates

So, now you know how to calculate what percentage of your investment will have to be successful in order to not lose any money at all. However, obviously you will want to know how much actual pure profits you are making as well.

Calculating this is also extremely easy and works using the formula below:

P – Profit ratio or profit margin

W – Winning ratio

B – Breakeven ratio

So, in order to calculate your profit margin you will have to subtract the breakeven ratio from your winning ratio.

The winning rate (W) is the ratio of successful trades. For example, if you have executed 100 trades from which 84 were successful then your winning ratio is 84%. Let’s take the example below:

You execute 46 trades from which 36 are successful. In this case your winning rate is (36 * 100) / 46 which is equal to 78%.

Imagine that the broker does not offer any kinds of rebates meaning that the out of the money ratio is 100% and offers a payout rate of 85%.

In this case your breakeven percentage is 100% / (100% + 85%), which is 54%.

As such, your profit margin (P) is 78% – 54% which is 24%.

So, let’s assume that you were investing $50 on all of the 46 trades that you have executed in the example above. This means that you have generated a total of $553 in profits.

This is calculated by multiplying the number of trades with the investment amount and with the profit margin:

46 * $50 * 24% = $553

In other words, you have invested a total of $2,300 and have won $2,853, from which $553 is profits.

Naturally, you do not have to deposit $2,300 at once in order to achieve that. You may as well deposit as much as only $250 (for example) and progress in increments of $50 investments. In this case you will be reinvesting your profits.

Final Words

So, this is how you calculate breakeven ratios and profit margins in binary options trading. As explained initially, binary options brokers most commonly never reveal this to traders. The information we presented above is generally never available at any binary options broker.

However, understanding the above mentioned issues is extremely important if you want to become a winning binary options trader. For this reason, we STRONGLY recommend you do these calculations at every binary broker you register at.

You should also constantly follow your profit margin with the second formula mentioned in this article. This way you will know EXACTLY how many profits you are making.

And this is all for this strategy guide. Thanks for reading this and we would much appreciate if you could share this with your friends or fellow traders so that more people will be able to understand how breakeven percentages and profit margins are calculated in binary options trading.

Additionally, you may as well continue to read our other binary options strategy guides that are listed on the menu on the right in order to learn about more advanced winning strategies.

Binary Options: Calculating Breakeven Win-Rate for a Given Payout

How often does my trades need to be successful in order to be consistently profitable in the long run when trading binary options? This is a very common question and the answer is shown in the formula above.

As you can see, the answer depends very much on the payout percentage for the given trading asset.

What is Win-Rate?

Often expressed as a percentage, the win-rate is the number of times on average that your trades are successful, out of a total of 100 trades. So, if you make a total of 1000 trades and are correct in 597 of those trades, then your win-rate is 59.7%.

In reality, for the win-rate number to be statistically significant, way more than 100 trades are needed, usually in the thousands. The larger the sample size, the more accurate the win-rate figure.

Breakeven Win-Rates for Common Payout Percentages

The table below lists breakeven win-rates for typical payout percentages offered by binary option brokers.

Payout (%) Win-Rate (%)
95 51.3
90 52.6
85 54.1
80 55.6
75 57.1
70 58.8
65 60.6
60 62.5

So, for example, if the payout is 70%, the trader will need to win on average 58.82 trades out of every 100 trades entered in order to achieve breakeven.

Calculating Expected Returns

Supposed a binary option trader have developed a trading system for trading USD/GBP that achieves a win-rate of 55%. While searching for a binary option broker, he found a Broker A that offers 80% payout and another Broker B who offers 85%.

Let’s see the expected return for each of these brokers.

We assume each trade having a deal size of $100, and the trader makes a total of 1000 trades using this system. Based on a win-rate of 55%, the trader will make 550 profitable trades and 450 losing trades.

With Broker A, the expected return is:

Total Gains from Profitable Trades = 550 x $100 x 80% = $44,000

Total Loss from Losing Trades = 450 x $100 = $45,000

Total Profit/Loss = $44,000 – $45,000 = -$1000

With Broker B, the expected return is:

Total Gains from Profitable Trades = 550 x $100 x 85% = $46,750

Total Loss from Losing Trades = 450 x $100 = $45,000

Total Profit/Loss = $$46,750 – $45,000 = +$1,750

Broker A Broker B
Payout 80% 85%
Total No. Trades 1000 1000
Trader Win-Rate 55% 55%
No. of Profitable Trades 550 550
No. of Losing Trades 450 450
Deal Size $100 $100
Net Gains from Profitable Trades $44,000 $46,750
Net Loss from Losing Trades $45,000 $45,000
Net Profit/Loss -$1,000 +$1,750

As you can see, even though it seems that the difference in breakeven win-rates is only a few percentage points, they actually matter a great deal in the long run.

Continue Reading.

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Many of the most popular financial instruments such as currency pairs, equities and commodities are available to trade using binary options. . [Read on. ]

Binary Options: Trading or Gambling?

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Binary Options & Trading Robots: A Perfect Match?

Unlike humans, robots have no emotion and do not need to rest, so they can make a lot more trades than humanly possible, combined with perfect consistency. [Read on. ]

Is Binary Options Trading a Scam?

Learn how you can get scammed when trading binary options if you are not careful. [Read on. ]

How to Select a Binary Options Broker?

With so many scam brokers out there, before you learn how to trade, one must know how to separate the wheat from the chaff and find a trustworthy binary options brokerage. [Read on. ]

Binary Options: Calculating Breakeven Win-Rate for a Given Payout

How often does my trades need to be successful in order to be consistently profitable in the long run when trading binary options. [Read on. ]

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Breakeven Win-Rates for Common Payout Percentages

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