Traders and investors seeking a different approach to their craft might do well to consider Nadex, an exchange with a very different, and some might say refreshingly disruptive approach to the markets.
Most stock investments are essentially a bet that something will rise in value. Nadex, turning the trading notion on its head, offers trades based in part on what will or won’t happen. The key point about Nadex, officially categorized as a “binary options exchange,” is that decisions are based on yes or no propositions. Will gold move to $1,750 before the end of this week? If you say yes and buy the binary options, and gold is above that level at expiration, the investment is a winner; if you said no and therefore sell the option, and gold is at or below that level, the investment is a loser. It’s that simple.
The concept is catching on, as Nadex experienced a 106% jump in year-over-year exchange volume in 2013.
Making an investment on what the market won’t do
Those familiar with options selling methods might say that being able to place a trade based on what a market won’t do – and benefiting from the time value depreciation – is nothing new, rather just an option selling technique. This would be both right and wrong, highlighting another unique aspect of the exchange. Unlike selling an option “naked,” where the trader is exposed to an unlimited risk, with each Nadex trade the risk and reward is both known to the investor at the time of the trade and is capped at the amount of the initial investment.
Nadex, regulated in the U.S. by the Commodity Futures Trading Commission, offers contracts in a variety of markets including stock indexes, currencies, commodities and events. At its core, the exchange is a play on probability tables. For instance, let’s assume the investor had an opinion oil was going to move higher over the next three months, past the $105 level. The trader would say yes, the market is moving past $105, and “buy” the market with an hourly, daily or weekly expiration. Each non-leveraged contract is worth $100 in total at expiration. In this case the contract might cost $45 – meaning the contract has a 45% chance of closing above $105. If oil were to close above $105 at the time of expiration, the contract would pay out $100 – netting the investor a $65 profit. If oil closed out at or below $105, the investor would lose the $45 they invested. The most the investor could gain, in this example, is $65 and the most they could lose would be $45.
A few additional key points of the exchange are that time frames can vary from long term to very short term – next Friday, for instance – and the contract does not need to be held to expiration. So let’s assume the oil trade mentioned above turns higher over a few days – reaching $100 in price – the contract might move to $65, and the trader can exit at any point, taking profits or limiting losses before the contract’s expiration.
Nadex: Regulated exchange holds customer segregated funds
Traders can open an account for free to trade directly through the Nadex exchange. Member funds are all held in a segregated bank account with a major US bank. Nadex also offers a simplified interface for traders and a free demo account to help traders to learn how to trade binary options and spreads in a virtual environment.
Futures, options and swaps trading involves risk and may not be appropriate for all investors.