Using Nadex To Trade US Stock Indices
The recent movements in the Stock Indices’ markets have caused many traders to want to jump in and trade. Typical thinking is often, since the market is going up, shouldn’t the cheapest binary be bought? What about spreads? Isn’t there more profit available there?
The charts at Nadex and the available binary options could provide some early insight. Using charts, indicators, and systems, it is possible to estimate what the market would have to do in order to be profitable. Does it require a big move to be accomplished before expiration?
Often, traders will see an up trending market and assume the trade should be a buy. The trader then chooses the cheapest binary available, and then wonders since the market was going up, why wasn’t the trade profitable. The trader chose the right direction, but the market didn’t make it all the way up to the strike price before expiration.
As an example, consider the following three strike prices all for the Nadex US Tech 100 market, based on the E-mini NASDAQ.
When a binary option is bought, the trader is saying that at settlement the statement will be true. Therefore, for the above strikes, the trader would be saying the market would be above each of those levels in order to be profitable. Suppose US Tech 100 is currently trading at 4791 and the charts show it is hesitating. There is one hour and 10 minutes remaining in the trade. What is the probability the market will move above 4797? Currently, the >4797 can be bought for $30, which is risking $30, with a $70 profit potential. The >4789 can be bought for $70, risking $70 with a potential $30 profit. This strike is in the money. As long as the market continues to hesitate and stays above 4789, this trade will expire in the money. Offering some insurance is the >4785, but it requires a risk of $85 with the profit potential of only $15. Determine if it is more important to have some insurance in the trade or is it the risk/reward? Sometimes this is tricky to figure out.
Apex Investing uses an expected range indicator that measures the historical expected moves of the market, as well as several volume indicators for liquidity and trend volume. If a trade has already exceeded its expected move, a little insurance for the trade might be the best choice.
Spreads have the potential to make a lot of money if there are big market moves. Consider the following scenario. Suppose the market has shot up and appears to have a breakout to go short. A trader could examine the following spread choices.
For the 4740 - 4820 spread, $222 would need to be put up to enter the trade with a profit potential of $578. Another choice is putting up $79 to enter the 4760 - 4800 spread trade with the possibility of earning $321. The indicative, which comes into play especially at settlement, is currently at 4801.
If a quick, short move down is expected, the at the money spread, which mimics the market, would be the best choice. However, if a bigger move is expected, the other spread may be the better choice. In the cheaper spread, which is not at the money, the first 60 ticks or $60 worth of movement would be missed because of where the bid is in relation to the market price.
Another consideration is the amount of money required to enter the trade. Instead of putting up the required amount of $222 for one spread, a trader could enter three contracts of the other spread at $79 each, using approximately $240. Let’s look at how this would play out.
Suppose the market moved all the way down to the floors of each spread. Money cannot be made beyond the floor level. For the 4740 - 4820 spread, with the bid of 4800, and the market moving down to 4740, this would be a move of 60 ticks or $600 profit.
For the 4760 - 4800 spread, with the bid of 4793.5, and the market moves down to 4760. This would be a move of 33.5 for a $335 profit per contract times three would bring earnings to $1005!
Be sure to consider other things besides cost, risk and reward. Look at expected market movement.
Apex Investing offers free trading education.
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