How To Trade NADEX Bull Spreads
NADEX Bull Spreads
Trading Is Risky
Trading binary options, bull spreads or any financial instrument is incredibly risky. Any decision to do so should be made with care and after consulting a professional. I am not a licensed, registered or certified financial professional, merely a student of trading. I have been trading stocks, options, futures, forex and binary options for over ten years. My experience has taught me many things. This is only an introduction to NADEX bull spreads, please seek out more information at its website:
What Is A NADEX Bull Spread
What Is NADEX You Ask?
That is an easy and a complex question. The easy answer is the North American Derivatives Exchange. The more complex version includes answers to questions like what are derivatives and what is an exchange? NADEX is the CFTC licensed and regulated market for trading binary options and bull spread derivative trading instruments. It is a marketplace for trading financial derivatives based on world indexes, commodities and currencies. It is the only regulated U.S. binary options exchange operating in North America other than the AMEX and CBOE exchange listed binary options. This doesn't mean that there aren't other high quality brokers offering services in the states, just that there legality in the U.S. marketplace is a questionable subject.
What Is a Bull Spread
NADEX bull spreads are derivative instruments just like options, binary options and futures. However, the differences between bull spreads and other derivatives lie more in the similarities. Bull spreads are a combination of features found among the other common trading vehicles. Spreads have a maximum risk and reward just like a binary option, an option spread or a hedged futures trade. When trading bull spreads you will be able to choose from a list of spreads with different expiry and different ranges. If the trade closes outside the range it is either in-the-money or out-of-the-money and pays or loses the predetermined maximum or minimum. This is just like a binary option, option spread or any other hedge. While inside the range the price will fluctuate along with the price of the underlying. Within the range the price of the spread will move on a point by point basis with a little slippage due to market conditions. Each point of movement, measured differently for each market, equals one dollar ($1). When used correctly bull spreads are a great way to trade futures with low cost and reduced risk.
- NADEX Bull Spreads- NADEX bull spreads are a financial derivative instrument used for trading and speculating world stock indexes, commodities, forex and even some economic announcements. They are a limited risk/limited reward trading vehicle with an enormous amount of leverage.
Nikkei Bull Spread Options At NADEX
Trading NADEX Bull Spreads
- How To Trade NADEX Bull Spreads - NADEX bull spreads trade like a future within the range and a binary option outside the range. If the spread closes above the rang it is in the money and pays the maximum return. If it closes below the range it closes out of the money and pays nothing. Within the range the spread trades in a fashion similar to a future and pays the spot price at the time of expiration. The potential profit or loss is the difference between the spot price and the total number of ticks or points between the lower and upper end of the range. Each tick is worth $1. To imagine the the possibilities consider buying a spread for $15 and selling it for $200. Now multiply that by 10 or 100.
- Selling NADEX Bull Spreads - One of the best features of trading NADEX binary and bull spread options are tradability. This feature is only offered on a limited basis by CySEC and other off shore brokers at this time. It is one of the best advantages of choosing an exchange like NADEX over a European style broker. Tradability means that you can sell your spreads at any time before expiry. Your profit or loss will be based on the spot price of the spread and the price you paid. This means that you can profit, or lose, using the increased leverage of a bull spread and get out when you want to. This also means that you can sell spreads short. Bearish positions can be set up in the same manner as selling NADEX binary options. When you sell you receive the bid price in the order screen and are risking the difference between that credit and the maximum return on the option if it closes in the money. This make selling bull spreads incredibly risky trading instruments. Selling or buying NADEX bull spreads should be handled with care and only after consulting a professional.
Nikkei Bull Spread At NADEX
Example Of NADEX Bull Spread
For this example I choose USD/JPY because it is one of the pairs that I follow. At the time these shots were taken the Nikkei 225 was trading around 12486. Notice that this is within the current range of this spread but also a little bit higher than the spot bid/ask price of 12464-12477 I considered this for a moment to try to figure out what it meant. Perhaps the Nikkei bull spread was suffering from selling pressure, maybe the market thought it would move lower. Lower down on the ticket you will see the direction, this is where you can choose buy or sell. Order types are GTC (good until cancelled) another awesome feature of NADEX trading. The next steps are choosing a trade size. Each trade is made in lots, this example is for one lot with a maximum profit of $328 and a maximum loss of $72. Next to the profit loss data are the market floor and ceiling, a quick and easy reference for the spread and its range.
- NADEX Bull Spread Strategy- Use bull spread to harness the leverage of futures trading while gaining the advantage and relative safety of binary and spread trading.
Selling A NADEX Bull Spread
Selling NADEX Bull Spreads
One of the many features of the NADEX trading platform and binary options exchange is cash settlement. This is also one of the reasons why it is possible to sell bull spreads. In order to sell a spread the only requirement is enough cash to cover the negative side of the trade. Because you receive a credit upon opening the position you risk is limited to the spread minus that credit. The spread on the US 500(S&P 500) shown in this example is ten points and the underlying is currently in the money. Selling this option pays a credit of $80 and risks only $20. The risk and reward here is good but the S&P must drop about 15 points over the next hour for it to pay off.
- NADEX Bull Spread Strategy- You can use NADEX bull spreads to fade the market. If you are expecting a knee jerk bullish reaction, or simply see one happening, you can sell an out of the money bull spread for a large credit and then buy it back later at a profit.
In The Money NADEX Bull Spreads
In The Money Bull Spreads
It is possible to buy a bull spread that is already in the money. This example shows the same bull spread as the previous but from the buying perspective. The S&P was trading around 1459 at the time I took this shot. The range of the option is 1545-1555, making it in the money at purchase. The trade risks $80 and pays $20, a high risk reward ratio, but only risks that amount for one hour. There is also a +4 point cushion since the trade is already in the money. If the S&P doesn't drop more than 4 points in the next hour this trade will pay $20.
To recap, this trade costs $80 and pays $20 at expiration, this is a 33% return on trade. The trade is at risk for only one hour and even comes with a 4 point cushion. I am sure you can see just how profitable a bull spread can be.
- NADEX Bull Spread Strategy- Buy in the money spreads with short expiration times to open trades that are instantly profitable. Look for returns between 30-50% and expirations a day or less.
For More On NADEX And Binary Options
For more information on trading NADEX binary options and bull spreads visit Binary Market Analysis.
Advantages Of NADEX Bull Spreads
- Low collateral - you only have to put up the amount at risk, most trades risk less than $100.
- Capped risk - risks are limited to the maximum allowed by the spreads range. This is a know quantity at time of purchase and will affect your capital requirement.
- CFTC regulated - NADEX is CFTC regulated to operate as a binary option and derivative instrument trading market. This makes it the best choice for U.S. based traders.
- Exchange - NADEX is a binary options exchange. It is in business to bring traders together and generates revenue from a set schedule of fees. European binary options brokers are banks the sell derivative binary options directly to clients, in essence when you buy a European style binary option you are trading with the house, not another trader.
- No PDT Rule - The Pattern Day Trader Rule is an obstacle for most traders. It requires a certain amount of sophistication, money, in order for traders to day trade. The rule is complicated and excludes many competent traders from the market. NADEX binary options and bull spreads are not subject to that rule.
- No margin account - Because NADEX options and spreads are cash settled and the PDT rule does apply you do not have to have a margin account.
- $100 minimum deposit - The minimum deposit is only $100 and is all you need to make most trades on the exchange (for one contract). There are no account minimums.
- Low Fees - Each trade costs $0.90 per contract. Maximum fee for any trade is $9.00. Compare this to European style options that take a percentage of the total. The more you trade the bigger the percentage.