Putting Your Spread To Bed: The Settlement of Your Nadex Spread, Part 1
The settlement of your spread can be a joyous moment or one you wish could have turned out better.
There is a favorite saying of mine that says, “You would rather wish you have something you don’t, as have something you wish you didn’t.”
This is true when it comes down to settlement time. If you are left holding a contract that you wish you would have gotten out of, you are not going to be happy with the results.
The settlement in a trade is the value or the price, at expiration, of whatever market you are trading.
The Nadex Glossary defines it this way: “Settlement value is the level at which a contract is settled, based on the expiration value and any relevant parameters of the contract (e.g. Floor/Ceiling levels for Bull Spreads).
Nadex Spreads must have a settlement value no lower than their floor level and no higher than their ceiling level.”
A Nadex spread is a simple derivative with built-in floor and ceiling levels that define the lowest and highest points at which it can settle. From the moment you enter the trade, and even when you are considering it, you know what your max loss and your max profit will be.
Even the title of the spread tells you what your floor and ceiling levels are, so you know the possibilities when you enter the trade. This information tells you the max loss and max profit, if you hold the contract to expiration.
However, when trading with Nadex, you can always exit the trade at any time prior to expiration.
As with Binaries, the value of the spread at expiration is based on the underlying market using the following process:
- 1) Take the last 25 trade or midpoint prices in the underlying market
- 2) Remove the highest five prices and the lowest five prices
- 3) Take the arithmetic average of the remaining 15 prices and round to one decimal point past the point of precision of the underlying market (with the exception of Wall Street 30, which is rounded to the same point as the underlying market)
Nadex uses Reuters as its primary data source to calculate settlement.
When you’re considering trading Bull Spreads, it’s good to know the benefits. They include the aspect of trading with strictly limited risk and that you need low collateral to trade. There are also many opportunities to place daily trades and you can take highly leveraged positions.
In part 2, we’ll look at an example of the settlement of a spread and break it down to make it more understandable.
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