Make Premium Collection Trades Everday, In Upward, Bullish Markets, Using Nadex Spreads
Ever heard the saying "There's more than one way to skin a cat"?
Well, there is more than one way to make profits in an uptrend or flat market with Nadex spreads, than just the market making a significant move up.
In fact, there is a way to profit by more than the actual move up the market makes, and a way to profit if the market stays flat or even if the market moves slightly down against your trade.
How, you ask? With premium collection trades using Nadex spreads in an uptrend. If you have experience or knowledge of trading options, then you may understand the basics of the concept. On normal credit spreads, a trader is limited to weekly, monthly or multi- month expirations.
Traders can do premium collection trades on Nadex with an advantage of capped, defined risk. In addition, all spreads expired in 24 hours or less. And there are even spreads that are only two hours from start to expiration. This allows for day and night time and multiple premium collection opportunities throughout a day.
A Nadex spread is a derivative of an underlying market and operates like an option -- in that it has a premium or time value. Depending on where the entry price is relative to the underlying market, there may be premium that may be potentially paid or collected by the trader.
The example below shows crude oil. There is time premium still in this spread, due to the time left until it expires, potential pending news, and the price of oil, CL, is in relation to the floor and ceiling. This is one example to show you how to see the premium and understand how premium collecting works.
Below is a screenshot of the Apex Spread Analyzer Scanner. You can see for the highlighted spread, Crude Oil (Apr) 98.00-103.00, that this spread’s floor is 98.00 and the ceiling is 103.00. Currently, as shown below, the ask price, if you were to buy the spread, is the number listed on the right side in that column, or 102.42.
When you buy a spread, your profit is the distance between your price and the ceiling. Now, the next column is called “proximity to underlying,” which means the distance between the spread price and the underlying market. (Proximity is calculated as the difference between the offer of the spread and the last price of the underlying if buying, and the difference between the bid of the spread and the last of the underlying if selling).
For example, if the CL futures is priced at 102.66 and the spread is priced to buy at 102.72, then the spread is priced above the underlying market, CL, by six ticks -- so there is six ticks of premium in the spread.
Most spreads will be priced this way. This means that by expiration, when all premium is gone, the buyer would need CL to move up at least six ticks by expiration. However, as a trader, you can be a payer of the premium or a collector of the premium.
In this example below, the spread price is 23 ticks below where the underlying Crude Oil market is trading. This is an example of an inverted proximity on the price of the spread. So effectively, if you bought this spread, you would be buying it 23 ticks below the underlying market.
If you find a spread close enough to the ceiling on a buy, look for your price proximity to be below the underlying market price. That’s when you have the opportunity to buy lower than the market.
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In the spread example above, if the market stays flat and doesn’t move you will make money, $23. If the market goes down slightly you can still make money, depending on how far it declines. Effectively, if it moves down 23 ticks you would break even. If it moved down 23 ticks and then moved an additional 23 ticks below your entry, for 46 ticks total, then you would lose $23.
Collecting premium means that, if the market does not move oe moves slightly against you, or moves in your favor, you can potentially be profitable.
Therefore, if the CL futures are priced at 102.66 and the spread is priced to buy at 102.43, then the spread is price underneath the underlying market by 23 ticks. If the market just stayed flat and settled at the same time, at expiration you would collect the 23 ticks of premium ($23.00 profit per spread). This would be a 5 percent return on investment in a single day, if the market simply stayed flat.
The more it moves up, the more potential profit you could make. Now, if you look in the max profit column, you see 55, so for every tick the market moves up by expiration, you can make an additional $1, up to $55 max. The market would have to move down 23 ticks plus 55 ticks more, for a total of 78 ticks down against you, as of expiration, for you to lose $55. This gives you a 1:1 risk reward ratio if the market moves, yet you can still make $55! This could yield a 12 percent return on investment in a single day, if the market moved in your favor by about 30 ticks, as of expiration.
The first thing you may notice on spreads is that they show a higher max risk when you are doing a premium collection trade. However, the focus should not be on max risk when doing premium collection. The focus is on where to get out in case the market moves against your position. Just because it says max risk, doesn’t mean the spread has to be held until expiration. The more time passes, the more premium will decay and the further the market could move against you in order to be at breakeven. It may move eventually to a point of 23 ticks against you when there is no premium, as of expiration. If the market were to settle against you by 46 ticks, that would still allow you to be trading in a 1:1 risk to reward scenario, but where 3 of 4 possibilities could happen and you could still be profitable.
Also, it is important to remember not only can you exit to limit loss before expiration, but you can also exit at any time you are in a profit. For instance, as time passes, even if the market stays flat or moves down some or even faster, if the market moves up, you can exit in order to limit your losses.
Again, because of possible max risk in this trade and because there is so much time until expiration, this isn’t necessarily an ideal spread for a premium collection trade.
There are times when premium collection trades work well for deep in the money trades. This can be true for spreads that have already gone into profit and are close to their ceilings and for times of flat markets.
Consider this strategy for uptrends. We will cover doing this strategy in downtrends in the next article.
After that, the third article in this series will be on how to collect money on both sides of the market enabling you to increase your profit in a strategy called an iron condor. Planned correctly, the iron condor can be a great strategy for news trades to collect premium on implied volatility, during lower volatile times when there is a decent amount of time until expiration and in a variety of other ways.
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, a service provided by Darrell Martin.
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