Nadex Free Education

WHY TRADE NADEX VS TRADITIONAL BINARY OPTIONS BROKERS?

Regulation

Nadex is the first binary options exchange to be regulated by the Commodity Futures Trading Commission. Unlike many binary options providers, Nadex does not take the other side of member trades or engage in trading of any kind. Member funds are held in segregated accounts in major US banks and are readily refundable

Binary Options with Nadex

Binary Options are relatively simple in the sense they have only two outcomes – correct or incorrect. Binary Options are similar to traditional options but with one key difference: their final settlement value will be 0 or 100. This means that the maximum risk and reward are always known and capped.

If the option expires in the money, each contract settles at a value of $100. If the option expires out of the money, each contract expires at a value of $0. You are not restricted to holding a position until expiration, though – you may place orders to trade in and out of positions at any point prior to expiration.

A huge range of strike prices, expiration times and underlying markets are available, making Binary Options the easy way to take a position on economic events, stock indices, forex, and commodities.

Binary Options are offered on global stock market indices, major FX rates, crude oil, gold and other commodities with a wide range of strike prices for various intraday, daily and weekly expirations.

Orders can be placed to open new positions or close existing positions throughout the life of each contract. The contract size for Binary Options is small – each lot has a maximum contract value of just $100, making these an ideal introduction to the markets for novice traders and an invaluable supplementary tool for the more experienced investor. Binary Option prices can move significantly even when the underlying market has very low volatility, creating multiple trading opportunities even in quiet markets.

Despite their potential volatility, binary contracts are designed to limit the risk to traders. There is a strict cap on the worst-case loss on any contract – each contract must settle at either $0 or $100. This offers the best of both worlds – multiple trading opportunities with a strict limit on market risk.

The following, shows an example of a binary options trade:

1. Crude oil futures are currently trading at $95, and you think it will end the day above $95.
2. $95 becomes your strike price, and you pay $40 to buy the contract.
3. Another market participant believes that it will close the day at or below $95, and puts up $60 to express his/her opinion.
4. If you are correct you collect $100 and your profit is the difference between the $100 payout and the $40 you spent.
5. If the opposing market participant is correct, he/she collects $100 with a profit of the difference between the $60 he/she spent to register an opinion in the market and the $100 payout.

Nadex Bull Spreads

Nadex also lists Bull Spread contracts. Bull Spread contracts on Nadex represent a single contract with a floor and ceiling range.

The Bull Spreads are settled on the basis of an underlying market. For major FX pairs this is the relevant underlying spot rate. For non-FX products this is generally a futures market; for example, crude oil Bull Spreads are settled based on NYMEX Crude Oil Futures prices. When you buy a Bull Spread you are taking a position that the underlying market will be higher when the contract expires. Conversely, when you sell a Bull Spread you are speculating that the underlying market will be lower at the time of settlement.

The Nadex Bull Spreads have both a floor and a ceiling associated with them. These represent the minimum and maximum levels at which the Nadex contract can be settled, no matter how far past either level the underlying market may have moved. The floor and ceiling values for each individual contract remain constant throughout the life of that contract. Because the settlement range of a Bull Spread is rigidly defined, the maximum possible loss (or profit) is always known in advance.

Contract size: $1 per point

All Nadex Bull Spreads are defined such that a 1-point (or 1-tick) movement means a $1 profit or loss per contract. For example, if you bought 5 contracts and later sold them for a 35-point gain your profit would be 5 x 35 x $1 = $175. Likewise, if you bought 10 contracts which were settled at a 19-point loss, you would lose 10 x 19 x $1 = $190. So whenever you trade a contract, you know that a 1-point movement is worth $1 per contract to you.

The definition of a ‘point’ can vary between different underlying markets. For example, crude oil is priced in dollars and cents, i.e. $71.58, whereas the Wall Street 30 is quoted as a whole number, i.e. 10625. In each case, one point is a movement in the last digit, i.e. $0.01 for crude oil and 1 index point for the Wall Street 30.

Trading Bull Spreads

When you open a position in a Nadex contract, you do not have to hold it until expiration. You can enter an order to close, or partially close, your position at any time until expiration.

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