Nadex Forex Bull Spreads

I would appreciate if you can explain how to uncap the floor or ceiling the bull spreads in a trending market, I understand it is done by hedging but how? Nadex does not explain any where about this.

Thanks.
Jacob

You 'uncap' when you're trading the underlying instrument and hedging with the spread and the trade goes in the direction of the underlying instrument's trade.

In other words, the risk is capped by the max profit of the hedge. But if the trade is in your favor, the hedge will expire worthless and you're out the cost of the option while the original trade runs on until you take profit. Risk is capped and profit is 'uncapped'. Make sense?

You can't have uncapped with hedging a spread with another spread because profit of both instruments is capped.

Why do this? Because it eliminates the whipsaw and you can have a "wider stop" per se. at the same dollar amount of a typical stop or you can go narrower but at a lot lower of a cost. Maybe $15 for the same "protection" you're getting on your $50 stop loss.

I've been demo'ing Nadex options for a few days and did well. I've tried both binary and the spread options. Bull Spread is a bit of a misnomer since you can be Bearish. I think Box Spread is more accurate since that's what it actually is. Anywho, I opened up a live account with $250 to play around with. I'm mirroring these trades with spot trades.

Last night I opened a Bull Spread trade on the GBP/USD. $11 for the 1.6140-1.6640 when price was at 1.6136. Price was out of the money which meant I needed to make up not only 5 pips to get in the money but also another 11 to b/e. That is the disadvantage. However, the beauty is that at $1 a pip, I'm only risking the equiv of an 11 pip stop. Which is pretty damn tight for a stop. I mirrored the trade with a spot trade and used a 33 pip stop. 1st Target for both trades is 1.6025. For the spot trade that ends up being a 1:1 trade. For the Spread option it ends up being 3.18:1. I ended up closing the option at 1.6195 for 55 pip profit with about 20 min. to go before expiration. That's a r:r of 5:1. On the spot trade that was a 1.7:1 r:r.

Can you see the huge potential there? $33 risk vs $11 risk on the same trade. That obviously comes at a probability risk. Suppose that price level hits but after the expiration of the option. I would have only made whatever pips had accumulated by expiration. Plus I had to make up the difference to get in the money plus 11 more pips to break even. I could have waited until price was closer to the option floor or even been in the money, but then I would have been paying a higher premium. Probably 3-5 times higher.

So as you can see, there is huge potential for low dollar risk trades with incredible r:r. But you need to account for the time decay risk. You also need to account for the ceiling. On the daily spreads, the spread is 300 pips. So if you get in near the floor, the odds of a 300 pip move even on a currency with a huge daily ATR is pretty unlikely. Also, the more in the money an option is, the higher the premium.

The other advantage is that not having a hard stop on an option can save your @ss because it can give your trade time to get in profit whereas a similar trade in spot may have been stopped out.

On the flip side, using these Bull Spreads as a hedge to your spot trade enables you to trade without a stop and take advantage of the capped risk. I could have sold the spread and achieved lower dollar amount risk than that of stop loss depending on where price was in relation to the spread and the premium.

You can also employ other options tactics like butterfies, condors, straddles, etc. But that's a different topic altogether. As are binaries.

Just found this thread.... Left FX abut a year ago and have successfully focused on equity options.... Started looking at Binaries and just found Nadex... Trying to find a binary broker that is legit.... Don't like the idea of trading against the broker.... I am hearing that with binaries, you are against the broker...
I do trade bull spreads with equities... maybe this will work well with Nadex

Nadex is an exchange and not a broker. You don't trade against them. You trade with/against other traders and/or market makers just like any other exchange.

I've been doing Bull Spreads with Nadex since the end of Dec. and have done well with them. There are all kinds of strategies to employ depending on your r:r tolerance and trading style and how much premium you're willing to put up.

The one thing I really like about Nadex is that it enables the small trader to trade things like Crude and Index Futures for very small cost. For example a Crude Light will run you about $6700 per contract. Crude Light minis are half that at around $3200. The most you'd ever pay for a crude light binary option is $99. (Which would be dumb.. bet $99 to win a $1?) Spreads are priced a little different, but still way cheaper than actual futures contracts.

I shorted CL this morning with a binary and a spread. The binary I picked up for $29 per contract and the spread for $38 per contract. The binary I let expire ITM and got paid out $71 per. The spread expired ITM and coincidentally also paid out $71 per. Normally I usually trade one or the other depending on where price is in relation to the spread floor/ceiling and premium cost. Anywho, I'm pretty happy with Nadex as both a speculative market outright and to also hedge my spot currency trades. I haven't done a lot of hedging but hedging with options is definitely a good tactic to learn rather than using stop losses.

Has anyone traded these with real money. On demo everything is smooth and easy. I am wondering how is the liquidity. Can you really trade in and out easily when the trades are real money? How deep is the bid ask during London and NY?

I've been trading these with real money since Dec. Liquidity is sufficient. Nadex has partnered with some market makers.

They operate an exchange on the backend but also as a broker entity as they face their clients. They say "no broker needed" but by definition that's because they are taking up that role themselves when it comes to accessing the exchange.

They are owned by IG Group, a big market maker in the UK, and while Nadex isn't directly taking on market making duties, you can bet they have strong business agreements with entities that are where they're getting paid to provide access to retail order flow. In the end, market making on binaries are hella profitable... so much so that brokers who use other platforms to provide them don't have to hedge their client's bets and provide the liquidity themselves... it's all part of the model, the expectancy is negative no matter how you flip the coin, meaning they just gotta keep you trading and eventually they'll get a profit on your account (your loss.) Kinda like how a casino sees running roulette tables.

I'm not a fan of binary options, and actively try to explain to people how they are setup against the retail client.. seriously they are shitty products.

I'd have to do more research on Nadex's bull spreads before I could comment on them, at first glance they appear to have a negative expectancy like binaries but with better odds for the client, but I must confirm first.

Nadex binary options are tradeable instruments. Meaning you can buy/sell at any time once you're in a position. In other words you can sell to limit the loss and get out at a smaller loss than the premium or exit before expiration for a profit other than expiration profit.

As far as the market maker stuff goes, how is that any different than retail forex and "liquidity providers"? Moreover, the R:R ratio on Nadex OTM binaries and spreads is head and shoulders beyond spot trades if you know what you're doing. But that's the key.... because of the time decay, you need to know what you're doing. You can't just leave some shitty trade on and wait for it to get back in the black because you don't want that unrealized loss to turn into a realized loss.

I certainly don't recommend trading Nadex options as speculative instruments for the non-profitable trader. But if you are profitable, Nadex definitely is worth looking into.

The real beauty of the bull spreads and even binaries to some extent is using them instead of stop losses. You can basically limit risk at a helluva lot lower risk cost. In some cases, you can even make money on both sides.

The thing with a properly executed options as a hedge is that you don't care that the option expires worthless and that the expectency is negative because that means your primary trade is profitable. You pay a premium like insurance to protect against loss. It's an added expense for the profitable trade, but you either get the same protection at a lower cost compared to a stop loss or you can get a wider stop for the same money. Think about that. Having to constantly fund your options account means your primary trading is consistenly profitable. If it were the other way around, then something is seriously wrong with your trading.

I don't want to sound like shrill. I have zero relationship with Nadex. I just want to keep the record straight that Nadex binary options are nothing like Cypress based "broker" binary options. Nadex binaries are really no different than the binary options offered by the CBOE. The bull spreads pretty much behave like a standard options bull hedge strategy without the extra work of buying a call and selling a put or vice versa. They really shouldn't call them bull spreads. Box spreads is probably more accurate.

My whole point is just to point that not all binaries are the same and that my experience with Nadex has been positive thus far. I'm pretty happy with them and actually pretty excited to finally have a way to use the same options strategies previously used in stocks and futures and apply them to retail spot forex where there had really been few and far between risk mitigation strategies available as there are to futures and equity markets.

I've been meaning to reply to this post for a while now but just didn't find the time til now (bored at work, flat and not much to do.)


Ok, so you're not locked in, I'd kinda expect that out of any "trading" instrument. What's important though is the spread you're paying if the product can be traded.. how it's set, who makes up the main bids and offers, etc...

Interestingly enough, the new Japanese regulations behind binaries (they are very pro-trader and anti-broker out there and jumped in to slow down the takeoff of binaries in Japan, where the product saw huge growth lately,) actually force a zero spread for binaries since they are so skewed against the trader.. understand, that means a regulator stepped in and said "no brokers, you're making too much already from clearing these options, you can't make a spread on them as well, the clients are getting raped." (Paraphrased in my own words of course, I'm sure the Japanese regulators were a lot more tactful in how presented that rule.)

Just something to think about.


How is it different? A spot MM will hedge out their exposure in other markets or with other banks. They'll make the market since they can profit from internalization (matching client orders off each other to capture the spread without taking on market risk) and any hanging risk can be removed with their lower total cost of trading on the institutional level.

A binary MM doesn't hedge their positions. They don't need to. I'm not saying they have the option to hedge their positions and turn it off and on depending on the trader, I'm saying they simply don't even if the trader shows a few wins. The products are constructed with a negative expectancy so the broker actually benefits from taking on more trades... like how a casino runs, the more money people bet and the higher the frequency of bets, the more the law of large numbers works in favour of the house vs the clients... fixed odds on your bet, can't beat the roulette wheel no matter what system you use.

What's that you say? Can't compare it to a casino since casinos do things like putting a limit on the bet size to keep odds in line? Did you notice that Nadex posts 'size' available on each trade? *blinks*

Seriously. I'm not kidding here. I've read this from a few industry insiders now that their partners who deal in binary options don't need to hedge. Hell, even go to SpotOption's site (one of the major whitelabel providers of binary option platforms,) they'll pitch ~20% returns on deposits (liabilities to clients) for the broker.. and that's after SpotOption takes their cut of the pie.

I know, I know, you think that Nadex is different from other binary providers... and maybe they run a slightly cleaner shop, but the base business model is the same. I'm not picking on Nadex here, they do look like a more professional outfit by their appearance and how they market themselves (a breath of fresh air vs some of the shady binary brokers I've seen,) I'm picking on the business model and products overall... which Nadex provides, lumping them in with the rest.

Err.. I wouldn't recommend trading any product to someone who doesn't understand them.

And yes, I've 'looked' into them along with a few binary providers. But I never even bothered to open an account. Not one offers a pricing structure that isn't completely brutal when viewed from a probabilistic and odds point of view.. I'd rather employ my capital in a market where having an edge is possible.

The one thing that perked my interest most was standing alongside the market makers and selling premium, since Nadex is an 'exchange' after all. But sadly, capturing order flow isn't done easily on their platform (you really need to do it via an algo/API since the amount of quote updates to follow an underlying market is impossible to accomplish with their retail platform. Plus, they prioritize their partner MMs first.) And just straight up selling a contract isn't the same as selling premium (in crossing the spread and being short, you're not paid premium to take the position and instead you're really just hitting another MM on the other side who is.. so it's not quite the same, nor as rewarding, as being an option "seller" in other exchange traded markets.)

And this is why I looked into binaries... using options as an alternative to stop losses is high on my 'desired' list. All my experience in doing so is with vanilla options in the equity markets (where the investor stands a chance of beating the odds vs the premium they put up to buy the option,) but to date I haven't found binaries to fit this niche in spot currencies. Some brokers offer vanilla options on spot, which would be a better fit for sure, but they quote huge spreads and make the additional cost not worth it vs a simple stop loss order (after all, being shaken out of a trade or not, there is a point where you're simply wrong on a trade and need to cut your losses.)

That aside, my main criticism is with binaries, not so much with bull spreads.

Actually, I do see one fault with bull spreads, the ranges they quote are huge and that can make pressing the upper or lower boundary of the range not a common thing unelss price starts off near a major round number.. so when price in in the middle of a spread range, it acts quite a lot like spot itself, only with a 3-4 pip spread instead of ~1 in the spot market... Oh, and if one side of the spread gets rushed by the underlying price, it starts to become less efficient at tracking the underlying and doesn't reflect the same movement, either forcing you to realize less of a gain than expected, or to roll your position into another bullspread that has more room to move (extra cost.)


I'll say it again, I have yet, to date, been informed of an edge that binaries provide retail traders. I keep asking the people who love them about it, but no one can give me hard numbers or proof... at best I hear marketing points repeated to me that came from the brokers pushing them.

(JR97, don't take this personally, I'm not out to slap you over your like of Nadex.. this is just about the products themselves and my disdain for them.)

Just in case you think I'm pulling this out of my butt, here's a few comments by the editor of an industry news source (broker focused, not client focused) on binaries in response to a few people asking about their odds:

http://i.imgur.com/kDuOXrp.png

Edit! now with source link: http://forexmagnates.com/binary-opti...4-integration/


I mean, you don't need someone telling you this to know the odds and cruddy pricing structure of binaries.. you just need to do the math to realize it. I just thought I'd give a source other than myself since I did say "read from a few industry insiders"..

This is just one example. I have a few email exchanges with others which mirror this..

==

Binaries are shitty products. I have little more to say about it after this rant.

No prob, Jack. You bring up good points and things for people to consider when approaching any market. My whole point was just to point out that the Nadex binary products are not the same as the bs cyprus binaries you see advertised all over the place. My other point is that you can have positive expectency and positive r:r if you do it right whereas the cyprus types are pretty much the same as a sports betting model that always have negative expectency and negative r:r.

As I also stated, you do have to know what you're doing. You can't just blindly hedge with a spread and think you're getting risk cost savings compared to a stop loss. In some cases maybe using a binary as the hedge instrument is better. Or maybe using a stop and not hedging is better. You have to know the strengths/weaknesses of each product type in addition to how they'll fit into your trading methods.

Yeah.. those are the cyprus type binaries.

Again, Nadex binaries don't work like that. You can bet $20 to win $80 depending on the strike and whether the option is ITM/OTM/ATM. If the market moves enough and you time it right you can bet $1 and $99 if someone will fill you. And with Nadex you can close the binary at any time. So you bet $40 to win $60 but it doesn't look like price will meet or beat the strike price. You can close your trade and take a smaller loss than your $40. Or if you're in profit close your trade and take $50 instead of the $60 settle price.

Premium collection is another strategy. Bet an ITM binary. Bet $60 to win $40. Negative r:r but higher probability of price meeting/beating the strike. Not working out? Close it early and lose than the $60 premium.

No offense Jack, but it looks you're just applying a blanket statement to all binary products and providers. Have you actually looked at the nadex website and looked into how their binaries actually work?

Yes, I've demo'd them a few times. They do appear to be better priced but the edge is still in the MM's hands and you're not given the tools needed to compete on the MM's level.

I've also done analysis on their binaries to plot out premium decay for time and volatility.. but when an edge can be found there, it's lost in having to cross the spread, paying the transaction fee, and hit a MM's order. They aren't giving cash away for free..

Where there's an edge to be found on Nadex is in making the spread itself, trying to capture some other retailers order by stepping in front of a MM's bid. But this is hard to do on their platform, and really should be the task of an automated system. Even when you do it, you gotta hope someone else hits your order, and that an MM doesn't join you on the limit price, since Nadex's MMs get a lot of preference on their exchange. (Not to mention you'd have to work out the MM's risk model to effectively out-price them.. since it's not just based on the one contract on it's own tied to a pricing model like Black–Scholes as used in vanilla options. That is to say I still need to research binary pricing models...)

PS. a lot of the junk brokers from Cypress also allow you to do what you described, "invest" $20, gain $80 for worse odds of winning and still negative expectancy, just to be clear, that's not exclusive to Nadex.

I wish binaries had the same type of upside potential as the options market. It could be an affordable place for retail to play FX options, but they are simply binaries. I think there are some interesting strategies out there that are applicable to certain types of traders.

Anyone have a bad experience they'd be willing to share about NADEX? How about good ones?

#FXFUSE

As critical as I may have come off about the products in recent posts, if you're going to trade them anywhere then Nadex is probably your best bet. They run a clean shop from what I can tell.

Jack,

Never hold judgements about trading products. No matter what anyone trades, the odds are highly stacked against everyone because of simple human error and emotions. As far as the shops, there is every right to steer people away from Cyprus gambling arenas! NADEX is CFTC regulated. Although regulation doesn't necessarily mean anything these days (PFGBEST) it's still better than nothing.

http://www.nadex.com/content/dam/nadex/files/fcm_agreement.pdf

#FXFUSE

I've been trading Nadex binaries and spreads almost daily since the end of december. Nothing but good to say as far as execution goes. The one thing that does sort of suck is that the daily binaries and spreads don't become available until 4:00 am EST. Which is 2 hours into the London open. They do have "intraday" or 2 and 4 binaries/spreads that are available earlier, but those don't fit my style.

The other thing that sucks is you can create limit orders for entry and exit but no stop orders. So there's no trailing stops.

Now that I've been doing these for a while it's apparent you can't approach them like you would a typical trade or even a typical options trade for that matter. Capped risk but also capped reward combined with time decay means you need to be on top of things to make sure you're picking the spread or binary strike that fits your strategy and risk tolerance.

I live in Germany and am not allowed to trade on Nadex. Is there some other broker that allows to trade Bull Spreads? I've googled for a couple of hours and couldn't find any, not even on IG Markets. Or are the brokers maybe labeling Bull Spreads by some other name that I'm not aware of?

Look for "Binary Options". You should be able to at IG...they own Nadex.