How to Determine Intrinsic Value or Moneyness of a Nadex Spread Option

Nadex Spreads are completely different than Nadex Binaries and determining the moneyness for them is also different. Though the definition for moneyness has the same meaning as the intrinsic value of the option, it is also effected by how close the spread is to the underlying market, or the proximity to the underlying market.

Below is a Nadex spread for EUR/USD with the underlying being the EUR/USD Spot Forex. As you can see, the floor of the spread is 1.3530 and the ceiling is 1.3630. If you buy this spread, you are long and the distance between your entry price and the ceiling is your max profit. The distance between your entry and the floor is your max risk. You cannot have additional loss should the market fall below the floor or additional profit should the market move above the ceiling. Your profit and loss is limited to the ceiling and floor levels respectively. How can we determine the moneyness of this spread? To do so, we need to see where the underlying market is in relation to the spread floor and ceiling and whether or not the position is long or short.

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Let’s assume for now we are long and bought this spread. Let’s also assume the underlying market is trading around 1.3657. The market has moved 27 ticks above the ceiling price of this spread. This spread currently would be what is called “deep in the market” or “deep in the money”, or another way to say it is, “deep in the spread” and “D” for short. What if the underlying price were in between the spread floor and ceiling at 1.3580? Then the spread would be “in the market” or another way to say it is, “in the money”, or “in the spread” and “I” for short. And finally, what if the underlying fell below this spreads’ floor? Then the spread would be “out of the market”, or also called “out of the money”, or “out of the spread” and “O” for short. The chart below shows a visual of where the underlying market floor and ceiling levels are, as well as where price would have to be to be considered deep in the money, in the money or out of the money, if you were long on this spread.

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What if we took the same spread, and instead of going long, we went short on the spread? Then you would reverse it. If the underlying market was below the floor, then the spread would be deep in the market. If the underlying were in between the floor and the ceiling, then the spread would be in the market. If the underlying were above the ceiling, then the spread would be out of the market. You can see this in the chart below.

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We understand now what it means for a long or a short spread to be deep in the market, in the market, or out of the market, but how do we figure profit and loss in relation to that? To figure max profit on a spread if you were long, it is the distance between the entry price and the ceiling, and the max loss, would be the distance between the entry price and the floor. To figure max profit on a spread you went short on, it would be the distance between your entry and the floor, and max loss would be the distance between your entry price and the ceiling. Take a look at the chart below for complete formulas on how to calculate your profit and loss, including fees and quantity, depending on if you were long or short and where your trade closed.

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