What Is A Nadex Spread?
What is a Nadex Spread?
A Nadex spread allows the purchase or sale of a contract of an underlying market from stock indices, currencies and commodities on the Nadex exchange. They are sometimes called bull spreads for long positions, bear spreads for short positions or just called spreads, and are simple short term contracts. There are both intraday and daily contracts available, and all are fully collateralized and provide limited risk. Price is driven by the underlying market. It is not driven by supply and demand of the spread, as the market is made based on where the underlying is located. Nadex is an exchange and regulated by the CFTC.
How can a spread have limited risk?
Every spread has a predetermined specific trade range, within a “floor” and a “ceiling” level. This distance between the floor and the ceiling is called the “width” of the spread, and establishes the fixed risk amount, so ythe max risk is determined before even placing a trade. They can be traded long or short for bull and bear positions. The underlying market can go well beyond the low bound or high bound, but the max risk only goes to the floor or to the ceiling level of the spread, and is determined by the purchase or sell price.
Looking at the APEX Spread Scanner, the underlying markets and the width of their spreads are listed as well as their price and max profit and loss as determined by the price. A very important point to remember is Nadex ticks in increments of one, whether it is a stock index, currency or commodity. Being priced for the retail trader, every tick or pip is worth $1.
The description column shows the spread highlighted is the US 500 (Jun) 1860.0-1870.0 (4PM). The first number, 1860.0 is the “floor”, and the second number, 1870.0 is the “ceiling”. As stated earlier every tick on Nadex is $1, so if the market moved from 1860.0 to 1870.0 that would be 100 ticks, or $100 on Nadex. Therefore the “width” of this spread is 100 as is listed in the column under Width (Nadex ticks) toward the right. After the floor and ceiling numbers it says 4PM. This is the time of expiration and settlement. This means price has until 4PM to move up or down, past the floor or ceiling, and even retrace and come back before exiting or taking profit. The price could go down and then come back up and it could still make a profit without being stopped out as long as it is done before 4PM.
The price column shows 1863.4/1863.9. The number on the left is the bid price paid to sell this spread, and the one on the right is the ask price paid to buy this spread. In order to buy, the price is 1863.9 which is the price on the right. The max risk will stay within the range of the spread. Buying this spread represents a bullish trade. The max risk is the distance between the purchase price 1863.9 and the floor 1860.0 which is 3.9 or 39 ticks. Max Risk ($) shows -39.9. This reflects the 39 tick risk, as well as the fee of $.90 to enter the trade for a max risk of $39.90.
The max profit is the distance between the price 1863.9 and the ceiling 1870.0 which is 6.1 or 61 Nadex ticks. Max Profit shows 59.2. This reflects the 61 tick max profit less the $.90 fee to enter, and less an additional $.90 fee to exit, for a max profit of $59.20.
For the trader’s convenience the APEX Spread Scanner reflects the exchange fees. Nadex has a trading fee per contract traded, entering or exiting of $.90 with a maximum charge of $9.00 per order. They do not charge for trades that settle “out of the money”. For example, the fee for entering into a spread and trading 11 would only be $9.00. Once a spread trade is profitable, the exit fee would only be $9.00. If however, a spread trade settled “out of the money”, meaning it is allowed to expire and it was unprofitable, there would not be an exit fee.
Nadex spreads offer the opportunity to trade simple short term contracts of an underlying market for defined, limited risk even when the price moves against the trade, or moves against the trade but comes back before the expiration time. Spreads are versatile in that they can be used to trade direction, volatility like during news events, or with other products as a way to hedge and limit risk from another trade.
APEX offers free education, effective tools and a room community of seasoned as well as up and coming traders. Together in a supportive environment, along with tools to trade with ease and convenience, traders of all levels can learn how to trade Nadex binaries and spreads as well as futures, forex, stock and optoins, and gain an edge for successful trading overall. To learn more about how to trade binary options in-depth and for binary options signals, trading strategies, tools and trade rooms see ApexInvesting.com
© 2014 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.