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Chip Frame on Trading with Defined Risk on Nadex

TradingPub Admin | September 30, 2013

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We were very excited to host Chip Frame of the North American Derivatives Exchange for a special session on trading options and spreads on Nadex.  We have posted a brief recap of the topics Chip taught during the session below the video recording.

Access Chip's Video by Clicking below:

To gain more free education on Nadex, simply go to our FREE NADEX LIBRARY

 

What Is Nadex?

-          North American Derivatives Exchange

-          CFTC registered, electronic exchange

  • DCM – Designated Contract Market
  • DCO – Derivatives Clearing Organization

-          Contracts designed for the active, individual trader

  • Low barrier to entry
  • Limited risk, fully collateralized contracts
  • Offers contracts derived from Stock Index Futures, Commodity Futures, Currencies

Why is this important?

  • Low barrier to entry

- A lot of people who want to trade

  • Limited risk, fully collateralized contracts

- No margin calls

- You cannot lose more than your deposit

  • Creates opportunities for:

- Active, individual traders

What Is a Binary Option?

-          Short-term, limited risk contracts

-          Statement made up of 3 components:

  • Underlying market
  • Condition/Strike Price
  • Expiration time

-          Similar to a traditional options except:

  • Buying or Selling there is risk and reward both capped

-          Trading price range will fluctuate between 0 (floor0 to 100 (ceiling)

-          Sometimes referred to as  “All or Nothing” options

-          True or False statement – either the event happens or it does not…AT EXPIRATION

  • If True – the options settles at 100
  • If False – the option settles at 0

-          Binary Price could be thought of as reflecting the probability of an event occurring

-          Similar to traditional options, time, and volatility are factored into the price

-          Do not have to wait for expiration to close a position

 

Example of a few Binary Statements

-          AUD/USD > .9600 (11AM) (30-MAY-13)

-          Germany 30 (Jun) > 8400 (4PM) (30-MAY-13)

-          Crude Oil (Jul) >92.50 (2:30PM) (30-MAY-13)

-          US 500 (Jun) > 1637.0 (4:15PM) (30-MAY-13)

 

Underlying market of Nadex listed products: Stock Indices

- Nadex offers 7 Global Stock Indices where the Nadex product is a derivative of the underlying futures stock index

  • Wall Street 30/CBOT E-mini Dow Futures
  • US 500/ CME E-mini S&P 500 Index Futures
  • US Tech 100/CME E-mini NASDAQ 100 Index Futures
  • US Small Cap 2000/ICE Mini Russell 2000 Index Futures
  • FTSE 100/Litte FSTE 100 Index Futures
  • Germany 30/Eurex DAX Index Futures
  • Japan 225/ SGX Nikkei 225 Index Futures

Underlying market of Nadex listed products: Commodities

- Nadex offers 7 different Commodity Binaries where the Nadex product is a derivative of the underlying commodity futures contract.

  • GOLD/COMEX/NYMEXM - Gold Futures
  • SILVER/ COMEX/NYMEX - Silver Futures
  • COPPER/ COMEX/NYMEX – Copper Futures
  • CRUDE OIL/NYMEX - Crude Oil Futures
  • NATURAL GAS/NYMEX - Natural Gas Futures
  • CORN/CBOT- Corn Futures
  • SOY BEANS/CBOT- Soybean Futures

Underlying market of Nadex listed products: Currency Forex

- Nadex offers 7 different Commodity Binaries where the Nadex product is a derivative of the underlying spot Forex rate.

  • EUR/USD / Spot EUR/USD rate
  • GBP/USD / Spot GBP/USD rate
  • USD/JPY / Spot GBP/JPY rate
  • AUD/USD / Spot AUD/USD rate
  • GBP/JPY/Spot GBP/JPY rate
  • USD/CHF/Spot USD/CHF rate
  • EUR/JPY/ Spot EUR/JPY rate

 

The Binary Price?

-          The Market Pricing of the Binary will trade between 0 and 100

-          At expiration of the contract, you want your contract to settle at 100 if you are a buyer , and at 0 if you are a seller.

-          The price will be dependent on Time until expiration

Price, Time and Underlying Market

-          Price could be thought of as reflecting the probability of an event occurring and is constantly moving

  • Example: 75 Bid / 77 Offer = 76% (mid-point) chance

-          The Binary Price does not necessarily move linear with the underlying market.

-          Both time to expiration and volatility can impact the price of the option

At expiration, Nadex calculates the expiration value.

 Process

-          When a contract expires, we obtain an expiration valued based on the specified underlying market, using the following process.

-          Take the last 25 trade or midpoint prices in the underlying market

-          Remove the highest five prices and the lowest five prices

-          Take the arithmetic average of the remaining 15 prices and round to one decimal point past the point of precision of the underlying market (with the exception of Wall Street 30, which us rounded to the same point as the underlying market).

-          The market prices we use to calculate the expiration values are obtained through a data feed from Reuters. If Reuters are unavailable, we may obtain market pricing data through Bloomberg or another data provider that we deem appropriate under the circumstances.

For contracts on economic Events, the expiration value is the figure released by the designated reporting body.

Midpoints apply to spot forex contracts.