The North American Derivatives Exchange offers spread contracts. Like a binary option, a spread contract pays out when the underlying security closes higher or lower than the purchase price. A spread contract has an upper and a lower bound. The current purchase price lies somewhere between these bounds, and the total profit or loss for any transaction is based on the initial purchase price.
Unlike binary options, spreads are not an all-or-nothing wager. Your profit or loss is determined by the difference between the purchase price and the expiration price, up to the maximum profit or loss as defined by the upper and lower bounds of the contract.
For example, let’s take the spread contract Wall Street 30 (Mar) 10400.00 to 10500.00 at 3PM. US 500 (May) is the underlying market 10500.00 is the lower bound, 10600.00 is the upper bound, and the expiration date is 4pm.
The current Bid and Offer prices for this contract will lie somewhere between 10400 and 10500, depending on the current price of the underlying security, the demand for this contract, and the time remaining until expiration For this contract, bid and offer prices are between 10400 and 10500, all depending on the amount of time remaining till expiration, the demand for this particular contract, and of course the current price of the underlying market. If you buy one lot of this contract at 10450, your maximum profit will be $50, and your maximum loss will be $50.
Nadex’s spread contracts consist of two types – the master spread, and five narrow spreads. The master spread for forex contracts ranges anywhere from 300-750 points. The master spread is subdivided into five smaller, narrow spreads that range from 100-250 points each for Forex contracts.
One benefit of Nadex spread contracts is that the floor and ceiling are clearly defined limiting both profit and loss . Other characteristics of Nadex spreads are that neither stop losses or leverage are offered on the products.
Because of the larger spreads, one may have to pay a larger premium to trade a spread contract than one would for a binary option. Losses or profits for spread contracts can be larger than binary option contracts of the same size.
Perhaps the major differentiator between spreads and binary options is that spreads don’t expire at their max loss or profit. The total profit or loss per trade is dependent on the difference between the settlement price and the purchase price. On a binary option, if the settlement price is even one point below your purchase price, the contract settles at zero and the full maximum loss is incurred. In the case of spreads, the only loss is the difference between the purchase and settlement price, up to the maximum loss.
The main difference between binary options and spreads if that they offer different risk profiles. Binary options offer a wider variety of time frames (intraday, daily and weekly), and have a more consistent risk profile.
These products are not suitable for everyone, so please ensure that you fully understand the risks involved . Past performance is not always indicative of future results