Many short term traders have never even considered trading options due to their long expiration times.
However, with Nadex Spread Options, this is quickly changing. The Nadex Spread is based on support and resistance trading. The risk to reward can be fantastic if the market moves the width of the spread. With Nadex Spread Options, the commissions are ninety cents per side/per contract up to ten contracts. For those who are trading more than ten contracts, the commission is capped at nine dollars per side. Since commissions are extremely low, price does not have to move a lot to cover the cost of the trade. Let’s look at a couple of examples to see how Spread Options work.
On May 2nd, the NASDAQ higher timeframes seemed to be indicating that the market would move up. On the 45-minute chart, sellers tried to test the ATR stop, but on the final approach sellers abandoned the downward movement. Highly volatile market reports at 8:30 a.m. presented an opportunity to enter a spread through Nadex. The current price on the NASDAQ was around 3595. Nadex had a Spread available with a floor of 3590. This allowed for entry with a price very close to the floor. As a result of the entry price being so close to the floor, the total risk was only $16 and the potential profit was $84 trading one contract.
In other words, the worst-case scenario for entering a long spread position was a risk of a $16 loss and the best-case scenario was a profit of $84. This made the potential risk to reward 1: 5.25. There were three higher timeframes suggesting that price would go up and volume on the 45- minute chart also suggested that price would go up. Additionally, the ATR stop supported price going up. Though price could have gone down, probabilities were indicating that it would go up.
For shorting the same spread, the profit potential would only have been $14 and the risk would have been $86. This should indicate that it is not the right range to trade because price is too close to the “floor”. The profit potential on a short is always the floor (low of the range). Likewise, the profit potential for a long is always the ceiling (top of the range).
When a trader desires to short a spread, they should find a spread with the price close to the ceiling; this new spread has $83 of potential profit and the maximum risk had now changed to $17.
As there was an unemployment report at 8:30 a.m., an alternative trading strategy would be for a trader to enter both a long position and a short position in anticipation of highly volatile movement. Typically, the unemployment report produces wide bars, and wide bars typically retrace. Knowing this, a trader could enter both sides of the spread – a long and a short. Since the options do not expire until 4:15 pm EDT, the movements could occur at any point in the day.
Another way to play the spreads is to hedge against a futures position. In other words, under the belief that the NASDAQ future contract would go up, a trader could enter a position on the futures side and then enter a short spread on the options side. This way, if the futures position did not pay off, the options side would be making money to cover the losses suffered on the futures side.
At first glance, spreads can be intimidating, but once traders understand them, they can become quite simple. When looking at Nadex spreads, traders should remember that for longs they should be closest to the floor because the ceiling is the profit potential.
To go short, a trader should be closest to the ceiling as the floor is now the profit potential.
When placing an order, the Nadex order entry window displays the maximum risk and the maximum profit on the trade. This way, traders can catch a potential mistake and avoid entering on the wrong spread option. Additionally, Nadex offers a free demo so traders can practice in simulation mode before going live. Unlike other binary brokers, the Nadex free demo is available before opening an account or adding funds.
There are many advantages to trading Nadex spreads. With Nadex Binary and Spread Options, users can trade futures, commodities and Forex all from one single account. Unlike other options, Nadex options are traded twenty-four hours a day. In other words, if the markets are open, then Nadex is open.
This is a great way for new traders to learn how to read charts, interpret price action, and practice volume analysis in a risk-controlled environment. An advantage to trading options is that precision is not as critical as when trading a typical futures contract. For those who are risk intolerant, trading spreads allows trading without being obsessed over potential losses. After all, losing ten to twenty dollars a pop is much easier on a trader’s emotional and mental health than losing $100 or more dollars a pop on the futures side. Yet, the learning experience is the same.
Gail Mercer, is a highly respected trader, trainer, author, and speaker residing in North Carolina. She has over 15 years of experience in trading and in the development of custom indicators. She is a successful author and has published two eBooks and is also a contributor to Stocks & Commodities and Benzinga.com. She has been recognized as an authority on Volume Analysis and has been asked to speak at the Traders Expo, Traders World, Wyckoff Conference, and Tradestation User Groups.
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