An Introduction to Nadex

Transcription

An Introduction to
Nadex
AN INTODUCTION TO NADEX
MULTIPLY YOUR TRADING OPPORTUNITIES, LIMIT YOUR RISK
Discover a product set that:
Allows you to trade in very small size (risking no more than a few dollars)
Gives you the security of trading on a CFTC-regulated US derivatives exchange
Caps your risk under all circumstances
Provides you with multiple trading opportunities every day, no matter how quiet the markets are
ABOUT US
Nadex, the North American Derivatives Exchange, is a retail-focused futures exchange subject to regulatory oversight by the CFTC
e offer easy to understand contracts which expire on very short time horizons (hourly, daily and weekly) and have a very small notional value (as little as
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$100)
Our contracts are based on the world’s major stock market indices, FX rates, commodities and economic events
o other regulated exchange offers a product set like ours. Nadex’s unique contracts are designed to combine small size and limited risk with a high
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degree of price action
Nadex traders get the best of both worlds: multiple real-world trading opportunities combined with an absolute cap on risk
ABOUT OUR PRODUCT SET
We offer two classes of product: Binaries and Bull Spreads
Both these classes of products have been designed to comply with the following core principles:
Intuitive pricing. Our Binary prices can be thought of as percentage probabilities of market events occurring. Our Bull Spread prices are referenced to
the underlying market, not to net premiums
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ery small contract size. The notional sizes of our contracts can be as small as $100, allowing you to scale in and scale out of positions with high
precision
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trictly limited risk. You can trade most of our contracts with collateral of less than $100, and you can never lose more than the collateral you have put
down
HOW DO OUR BINARY CONTRACTS WORK?
Simple, easy-to-understand “yes”/“no” propositions, e.g. “EUR/USD to be greater than 13000 at 3pm ET”
Intuitive pricing. At any point the price of a Binary is simply the market’s perception of the percentage likelihood of the contract settling as a “yes”
ery small contract size. At expiration each lot settles at $100 for a “yes”, $0 for a “no”. The maximum collateral required is always less than $100 per lot,
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often much less. And you can never lose more than your collateral
trictly limited risk. At no point can the contracts be priced outside the range 0-100, regardless of volatility in the underlying market. You always know your
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absolute worst case risk for any position you take, regardless of whether you are going long or short the contract
arkets are open right up until the moment of expiration, allowing you to place orders to enter and exit a given Binary position multiple times as the market
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moves. Even though the contracts have an “all or nothing” payout, you are not restricted to an “all or nothing” trading strategy
WHAT FACTORS MAKE BINARIES SO COMPELLING?
Binaries are intuitive – the Binary price is simply the market’s view on the percentage probability of a given outcome happening.
Because of this, Binaries can multiply the size of price action in a quiet market.
If a Binary is at-the-money as expiration nears, small moves in the underlying can create large percentage swings in the price of the Binary.
Despite these large swings, the design of our contracts means your risk is always known and strictly capped. You are always in control of your exposure.
The following example illustrates this effect.
North American Derivatives Exchange, Inc. is subject to U.S. regulatory oversight by the CFTC.
An Introduction to Nadex, June 2013
Page 2 of 8
A HYPOTHETICAL EXAMPLE: “EUR/USD TO BE ABOVE 13000 AT 3PM ET”
The chart below shows a hypothetical example of price action for spot €/$, and a Binary based on spot €/$, during the 20 minute run-in to the Binary’s
expiration.
B
13010
D
13005
13000
Spot €/$
Rate
12995
C
12990
12985
A
12980
12975
100
90
80
70
60
Binary
Price
50
40
30
20
10
0
As spot €/$ moves through the strike price of the Binary (13000, shown as the thick red line in the top chart), the price of the Binary changes dramatically
From point A to point B, €/$ rallies by 0.18%
The Binary rallies from a price of 4 to a price of 82, a 2000% increase in price
From point B to point C, €/$ falls by 0.09%, back through the strike price
In response, the Binary price declines by 83%
From point C to point D, €/$ edges back up by 0.06%
The Binary price rallies by 500%, from 14 to 84, in response You could trade in and out of this price action continuously as the situation unfolds. But at no
point do you face unbounded risk and at no point do you face any demands for additional margin A trader buying one lot of a Binary at, say, 40 can never
lose more than $40*. A trader going short of one lot at 40 can never lose more than $60* (100 minus 40)
* Excluding commissions and fees
Page 3 of 8
WHAT FACTORS MAKE BINARIES SO COMPELLING (CONTINUED)?
Nadex offers a range of hundreds of different Binary contracts each day, with dozens of strike prices for each underlying market
This variety of strike prices multiplies the trading strategies open to you
The diagrams below show a typical subset of Nadex’s “US 500” contracts, which settle basis an Expiration Value calculated by reference to the CME® E-mini®
S&P 500® Futures, together with representative prices before and after a major positive shock to the underlying market
BEFORE
AFTER
1256
1254
Contract
Bid
Offer
Daily US 500 (Mar) > 1255
-
2
1252
21
23
2
5
1250
38
41
1248
Contract
Bid
Offer
8.5
11.5
20.5
24
37.5
41.5
56.5
60.5
72
75.5
1242
85
87.5
1240
1238
99
-
1236
-
-
-
-
93
95.5
96
98.5
98
-
1246
1244
1234
55
59
72
75
86
88
92
94
95
97.5
98
-
A trader interested in taking a long-shot on a rally could buy the “>1255” at 2, risking $2 to potentially make $98*
A trader interested in selling volatility and backing a rally could buy the “>1237” at 75.5, risking $75.5 to potentially make $24.5*
A trader interested in taking a bearish view, but with no strong view on volatility, might sell the “>1240” at 56.5, risking $43.5 to potentially make $56.5*
These are just simple examples. There are many other possibilities and many other trading strategies that can be built with these contracts.
* Excluding commissions and fees
S&P 500 is a registered mark of the McGraw-Hill Companies, Inc. CME and E-mini are registered marks of the Chicago Mercantile Exchange Inc. Nadex is not affiliated with these
organizations and neither they nor their affiliates sponsor or endorse Nadex or its products in any way.
Page 4 of 8
HOW DO OUR BULL SPREAD CONTRACTS WORK?
A simple option strategy, packaged as a single contract
Nadex Bull Spread is equivalent to a vertical call spread constructed out of very short term (intraday) calls. Each contract is a combination of a long
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position in a call with a low strike (the Floor) and a short position in a call with a higher strike (the Ceiling)
Intuitive pricing. Contracts are not priced as net premiums but instead are referenced to the underlying
ery small contract size. Our contracts have a per-point value of as little as $1, and the gap between Floor and Ceiling can be as little as 100 points. The
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maximum collateral required is always less than the Floor-Ceiling range, often much less. And you can never lose more than your collateral
trictly limited risk. At no point can the contracts price outside the Floor-Ceiling range, regardless of volatility in the underlying market. You know your
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absolute worst case risk for any position you take, regardless of whether you are going long or short of the contract
The Floor and Ceiling cap risk without exposing you to the risk of being stopped out by a temporary adverse move in the underlying market
The next few pages give an example of a typical network of Bull Spread contracts on spot €/$
100PT €/$ FX BULL SPREADS EXAMPLE
12850
At 7am ET, €/$ stands at 12750 and the following overlapping 2hr FX Bull
Spreads are created:
12830
€/$ 12750-12850 (9am)
€/$ 12700-12800 (9am)
€/$ 12650-12750 (9am)
12800
Economic figures are expected at 8:30am ET.
12780
This network gives an FX trader several possible strategies for taking
advantage of a market move caused by the 8:30am figures.
12770
Some strategies are very close to OTC spot FX trading, some are more
sophisticated and “option-like”. All offer a high level of effective gearing*, all
are strictly limited risk and none can result in a trader being “stopped out” by
an intermediate adverse move.
12750
Spot €/$ level at 7am
12730
In the examples that follow, commissions, fees and bid-ask spreads are
omitted for the sake of simplicity. In practice Nadex traders typically see bidask spreads of 2 pips for €/$ FX Bull Spreads.
12720
12700
12670
12650
Key
Spread Contract
2 hours to expiry
Zone of linearity (price of FX Bull
Spread is same as, or within 1-2 pips,
of underlying spot market in this range)
Total range covered by network = 200 pips
* within each contract’s Floor/Ceiling range
Page 5 of 8
100PT €/$ FX BULL SPREADS EXAMPLE (CONTINUED)
12850
The “X” against each contract shows the trading price of each Bull Spread at
7am.
12830
The 12700-12800 contract is centered on the current market level of 12750.
The price of this contract is also 12750 – it is the same as the underlying spot
market and generally will remain so within approximately a 60-pip range.
12800
A trader buying or selling this contract has both his potential maximum profit
and his potential worst-case loss capped at 50 pips. Note that the position
cannot be “stopped out” if the underlying market moves adversely beyond
the range of the contract – the contract remains live until expiry, regardless of
underlying market movement.
12780
12770
12750
12760X
X12750
12740X
12730
12720
12700
12670
12650
Key
Spread Contract
2 hours to expiry
12850
The 12750-12850 contract has a floor at the current market level of 12750.
The price of this contract is 12760 – it is 10 pips higher than the spot rate,
reflecting the optionality inherent in its design.
12830
For a trader buying this contract, potential profits are capped at 90 pips but
losses are capped at just 10 pips.
The 12650-12750 contract has a ceiling at the current market level of 12750.
The price of this contract is 12740 – it is 10 pips lower than the spot rate,
reflecting the optionality inherent in its design.
12800
12780
12770
12750
12760X
X12750
12740X
12730
Again, a trader selling this contract has potential profits capped at 90 pips but
losses capped at 10 pips.
Note again that, in either case, the trader cannot be stopped out if the market
moves adversely against them beyond the range of the contract – the contract
remains live until expiry, regardless of underlying market movement.
12720
12700
12670
12650
Key
Spread Contract
2 hours to expiry
Page 6 of 8
100PT €/$ FX BULL SPREADS EXAMPLE (CONTINUED)
12850
Five minutes after the release of the economic figures, and after
considerable whipsawing in the market, spot €/$ is trading higher at 12825.
12847
12825X
Spot €/$ level at 8:35am
X12798
12800
12797
The 12750-12850 Bull Spread is trading at 12825, exactly the level of the
underlying market. A trader who had bought this at 12760 would be sitting on
a 65 pip profit as a result of the 75 pip favorable move in the underlying. But
at no point in that move would he have risked more than 10 pips, and at no
point would he have been in danger of being stopped out.
The 12700-12800 Bull Spread is trading close to its maximum value, at
12798. A trader who had bought this at 12750 would be sitting on a 48pip
profit; a trader who had sold this at 12750 would be sitting on a 48pip loss.
12753
12750
12747
12749X
The 12650-12750 Bull Spread is also trading close to its maximum value, at
12749. A trader who has sold this at 12740 would be sitting on a loss of just
9pips, even though the underlying spot moved against him by 75pips.
12703
12700
12652
12650
Key
Spread Contract
25 minutes to expiry
Page 7 of 8
FX BULL SPREADS – WHY SO MANY CONTRACTS?
Spot
€/$
Single Daily FX Bull Spread,
range = 600 pips
Path of spot €/$ over day
T (end of Time
day expiry)
Network of 3 2-hour FX
Bull Spreads, range = 100
pips each
Network of 3 8-hour FX
Bull Spreads, range = 250
pips each
Nadex offers networks of FX Bull Spreads of varying widths and with varying expiry times. Each network, when created, is centered on where the spot market
is at time of creation.
In total, Nadex offers 70 Bull Spread contracts per currency pair per day.
The fact that there are so many contracts, and that they have floor/ceilings governed by the level of the underlying spot rate when they were established,
means that traders can almost always find a contract floor/ceiling in the vicinity of the current spot rate. This means that sophisticated traders are assured of
the opportunity to generate high leverage on a directional view.
It also means that traders familiar with the OTC spot FX market can almost always find contracts that behave linearly and are priced in line or very close to the
underlying spot rate.
Whatever the style of the trader, Nadex Bull Spreads will tend to have a high level of effective gearing (compared to conventional spot FX), will always be
strictly limited risk and will never cause that trader to be “stopped out” by an intermediate adverse move.
RANGE OF MARKETS
We offer contracts on:
Equity Indices: US 500, Wall Street 30, US Tech 100, US SmallCap 2000, Germany 30, Japan 225, FTSE 100®
Spot FX: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, GBPJPY, EURJPY
Energies: Crude Oil, Natural Gas
Metals: Gold, Silver, Copper
Agriculturals: Corn, Soybeans
Economic Events: Initial Jobless Claims, Fed Funds, Nonfarm Payrolls
Futures, options, and swaps trading involves risk and may not be appropriate for all investors. Any trading decisions that you may make are solely your responsibility. The information presented herein is for
informational purposes only. The contents hereof are not an offer, or a solicitation of an offer, to buy or sell any particular financial instrument offered on Nadex.
North American Derivatives Exchange, Inc.
311 South Wacker Drive • Suite 2675 • Chicago, IL 60606
Phone: 312-884-0100 • Fax: 312-884-0940 • Email: [email protected]
www.nadex.com
Page 8 of 8

An Introduction to Nadex

Transcription

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