NADEX is the acronym for the North American Derivatives Exchange. This is a binary options exchange which offers American-style binary options.
NADEX is currently only open to US citizens and US residents. However, if you live in other countries, you can still open a non-US binary options account with Cantor Exchange, which still gives you access to the same trading contracts and specifications for American-style binary options trading.
One advantage that NADEX and Cantor Exchange offer is that the trading of binary options is exchange-mediated, without the interference of a binary options broker. As such, trading is clearly more transparent, devoid of price manipulations and other sharp practices that some unscrupulous brokers in other climes perpetrate.
TRADE CONDUCT ON NADEX
How are trades conducted on NADEX? You will not see the boundary options or the Touch option types on the American binary options exchanges. Rather, you will see the special option type known as the 0-100 binary options.
In a 0-100 binary options model, two prices are displayed: the BUY and SELL price.
The BUY price is the price at which the asset will be sold to the trader. Depending on the number of units of the asset being bought, the BUY price is deducted from the trader’s account balance. Put another way, this price is added to 0 and deducted from the account balance.
The SELL price is the price at which the trader can sell the asset. This price is deducted from 100, and the difference deducted from the trader’s balance. If more than one unit is bought, this difference is multiplied by the number of units, and the amount deducted from the trader’s account.
The success of failure of the trade will therefore depend on the asset price ending above or below the strike price, and the number of contracts that the trader has purchased or sold. Here is a trade example to illustrate this.
TRADE EXAMPLE
Gold is usually listed in a pairing with the USD. So factors that promote the value of the USD will usually work to depress the price of gold. Let us assume that global demand for gold is down as a result of USD strength, and that a trader we shall call Brother John has decided to profit from a down-move on the gold asset, how is this traded on an American-style binary options exchange such as NADEX?
Step 1: COMPLETE THE TICKET
– Gold (Mar); Price = 1294.0 (1:30PM is expiration)
Brother John decides to sell 10 contracts of gold at the BID price of 75.00, with each contract being worth $1 per point. Once this contract is displayed, it also displays the maximum profit/loss that will accrue from the trade. For this trade, maximum profit is $750 (i.e. {0 + 75} X 10 contracts. Maximum loss is $250 (100-75} X 10 contracts.
Step 2: TRADE MONITORING
The trade will settle at 100 if the price of gold settles above 1294.0 by 1.30pm, or settle at 0 if the price of gold settles below 1294.0.
Step 3: TRADE SETTLEMENT
How is the trade settled when the trader makes profits or loses on the trade?
Profit Scenario:
At 1:30pm, NADEX’s expiration value for gold is 1,210.45. Your trade settles at 0, hence settlement price is $75. Your profit would therefore be the settlement price X number of contracts (10 in this case) = $750.
Loss Scenario:
In a loss scenario, trade settles at 100, hence settlement price is 100 – 75 = 25. The value of the loss is $25 X 10 contracts = $250.
NADEX and Cantor Exchange charge transaction costs on these trades. So the cost of transaction will be deducted from the trader’s account to give the final settlement value.
Now what happens if Trader John is bullish on another asset such as silver? In this case, what John will do is to buy silver at the offer price (i.e. SELL price), expecting the price of silver to go down.
Step 1: COMPLETE THE TICKET
– Silver (Dec); Price = 32.40 (1:25PM is expiration)
Brother John decides to BUY 10 contracts of silver at the OFFER price of 20.00, with each contract being worth $1 per point. Once this contract is displayed, it also displays the maximum profit/loss that will accrue from the trade. For this trade, maximum profit is $800 (i.e. {100-20} X 10 contracts. Maximum loss is $200 (0 + 20} X 10 contracts.
Step 2: TRADE MONITORING
The trade will settle at 100 if the price of silver settles above 32.40 by 1.25pm, or settle at 0 if the price of silver settles below 32.40.
Step 3: TRADE SETTLEMENT
How is the trade settled when the trader makes profits or loses on the trade?
Profit Scenario:
At 1:25pm, NADEX’s expiration value for gold is 33.12. Your trade settles at 100, hence settlement price is $80. Your profit would therefore be the settlement price of $80 X number of contracts (10 in this case) = $800.
Loss Scenario:
In a loss scenario, trade settles at 0, hence settlement price is + 20 = 20. The value of the loss is $20 X 10 contracts = $200.
In a nutshell, this is how NADEX binary options trading works. The trader’s job is therefore to conduct analysis to enable the trade to be set in the correct direction.
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