Binary Option-Bull Spread

As we have already looked at this product in great detail I do not propose to dwell on it here, but simply add it in for completeness.There is one big difference with Nadex as an exchange. Here you can trade direct with the exchange, something which is not available with the others listed here which all require a specialist broker. In addition many of the Nadex products are also available through IG index.Bull Spread:The bull spread is a variant of the binary option, and one we will look at in more detail when considering some binary trading strategies later in the book.

For now let’s look at what this instrument does and how it differs from the binary option product itself.You can think of the bull spread as a simplified version of the bull spread strategy available in the world of vanilla options, where the structure of the trade is created by buying and selling calls with different strike prices. With Nadex the hard work has been done for you, with the same risk profile created through a single instrument.

And here it is important to note the settlement is against the underlying spot market price, and not 0 or 100. Whilst the risk and reward profile is fixed, it is fixed in a different way using the spot market to create the floor and ceiling of the instrument.The spread referred to is the difference between the floor and the ceiling of the instrument which then defines the upper and lower levels of risk. As with the binary option product, this is an instrument which has defined and limited risk, and defined and limited profit.

An example of how this is quoted is as follows:GBP/USD – 1.6400 to 1.6550 at 4:00 pm The spot market is currently trading at 1.6450 The spread here is 150 pips and defines the floor and ceiling of risk. In other words, these are capped, so even if the market moved outside this range at expiry, your profit and loss would be capped and defined by these levels.

As you would expect, you can buy or sell the contract, depending on whether you think the market is moving higher or lower in this timeframe and before the expiry of 4.00 pm.Let’s assume we are indeed bullish and buy at 1.6450, this sets the floor and ceiling of profit and risk as follows:Maximum profit – 1.6550 – 1.6450 = 100 pips Maximum loss – 1.6450 – 1.6400 = 50 pips This defines the maximum profit and loss on the position, whatever happens to the underlying spot market, and even if there were a volatile move and the spot rate fell to 1.6300, or moved to 1.6600, the maximum profit and loss profile would remain the same.

In this example, if the market did indeed move higher by expiry, but remained below the ceiling of the spread, your profit would simply be the difference between the open and closing price of your order ticket. Equally if the market moved lower, but remained above the floor, any loss would simply be the difference between the open and closing prices of the order ticket.However, it is important to note even if the underlying market does move outside the spread, this does not trigger a close of the option.

The bull spread option only closes at expiry, but you can close it yourself by reversing the opening order. A buy order is reversed with a sell order, and vice versa. Again you can trade in multiple contracts and also remove partial contracts during the life of the option.The bull spread is an extremely versatile variant of a binary option and removes the complexities of creating this strategy through multiple option legs in the vanilla world.

As you will see when we look at binary option trading strategies, this unique product lends itself to many different uses, but all are defined with the same limited risk and limited profit profile.In summary, just as in the off exchange binary world, the on exchange products now available are beginning to increase to offer broader market opportunities.

Those I have highlighted in this chapter are the primary ones available today, but the list is growing all the time, both in terms of the products themselves, and also the markets.The binary spread with Nadex is a classic example, as this is now available not just for forex, but also for commodities and indices as well as across a variety of timeframes from hours, to days weeks and months. And if you prefer to trade options through your futures broker, these too are increasingly available. So some interesting times ahead as this market develops and matures.