Learn The Tricks To Trading Spreads Mirroring Futures


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By Darrell Martin

So you want to trade spreads mirroring futures?

If the markets make a sudden big fast move you want to take advantage of the limited defined risk that spreads have unlike trading futures. However, you still want the same profit potential as the futures markets. North American Derivative Exchange or Nadex provides spreads to trade and, like the name says, spreads’ prices are derived from the underlying markets.

They act similar but not exactly the same as the underlying futures markets their prices are derived from. They will tick in the similar direction, but not exactly tick for tick at the same speed, and not at the same value. How then, can we trade them like futures if they are similar but not the same?

There are some tricks to trading spreads mirroring futures.

The first is choosing the right spread, one that is moving as close to the same speed as the underlying market. It was just mentioned though that they are different, they don’t move at the same speed tick for tick. That’s true they don’t, but there are times when they are as close to tick for tick as you can get, and that’s when you can trade them to mirror futures.

To master the first trick, know that a spread’s price will move the slowest when the underlying market is close to the spread floor or ceiling. As the market moves toward the center of the spread, the spread price will move the fastest.

This is what is known as the delta, the rate of change in the spread’s price compared to the underlying price. For example if the underlying market moved 10 ticks but the spread only moved seven ticks, then the delta was 0.7. Don’t worry about the actual number 0.7; in this example, it’s used as a marker to begin to visualize the speed of a spread’s price movement.

On a buy spread when the underlying market price is below the spread’s floor, then the delta is below 0.5. When it’s at the floor, the spread’s delta is 0.5.

The closer the underlying market price gets to the center, between the spread’s floor and ceiling, the delta gets closer to 1.0. At a delta of 1.0 the spread will move tick for tick with the future. Once the underlying market passes the center and makes its way up toward the ceiling level price area of the spread, the delta will decline again getting closer to 0.5.

Now you can see how buying a spread in the bottom ⅓ price level would be placing your trade when the delta is growing, getting closer to moving tick for tick like the future’s market, versus if you buy in the top ⅓ of the spread’s pricing area where the delta will be moving down from a delta of 1 when it was center, to 0.7, to eventually 0.5 and so on once it gets above the ceiling.

The same would hold true if you sold a spread. Selling a spread in the top ⅓ of the pricing level would be placing your trade when the delta is growing and getting closer to moving tick for tick like the future versus, if you sold in the bottom ⅓ of the spread’s pricing level the delta will be moving down from 1 when it was center, to approximately 0.7, to eventually 0.5 and so on once it gets to below the floor.

If you understand Nadex Binaries and how they move, when they are ITM, OTM and ATM, then this is another way to visualize how spreads move. Binaries, when they are ITM and OTM, move very slow; but when they are ATM, they speed up.

If you bought a binary for $40, it can move to $70 a lot faster than a binary you buy for $80 will move to $100. It is the same for binaries buying the bottom 1/3rd or selling at the top 1/3rd of their price will take advantage of the faster speed price changes. Again using a binary example just to put it on familiar terms, if you sell a binary at $90 or $95 it will move really slow.

Selling at $70 will move faster. Selling at $10 will be very slow again. You can see this easily looking at a price ladder. Those ⅓ areas will move faster, and so will an ATM binary trading right around strike price and a spread trading in the center between its floor and ceiling.

Using the Apex Spread Scanner you can easily see which spreads are ATM and which spreads are trading the closest to the underlying. There is a column on the spread scanner labeled TM, which stands for The Market.

Each spread will have either an I for ITM, an O for OTM or an A for ATM. In this case you want A for spreads whose prices are trading At The Market. You will find their proximity to the underlying will be closest to 0 than the others. The second trick is to understand how many spreads you need to equal the value of 1 future contract. This is important if you expect your profit potential from trading spreads to be on par with the profit from futures.

To begin know that Nadex Spreads move in increments of 1, and a 1-tick move on a spread is always worth $1. Lets look the spread US 500 the derivative of the ES. From the example below you see you will need 5 US 500 spreads for a 1-tick move in the spread to be equal to a 1-tick move on ES.

These ratios are all figured for you on the spread scanner for every Nadex instrument. You can choose to trade 5 spreads or you can reduce and limit your risk and trade a smaller amount of spreads as well. This is an advantage for traders with smaller accounts. For all traders, in general you have more options to limit risk amount with spreads yet still have the profit potential opportunity available.

The third trick is to understand how the bid-ask spread will affect your profits. Now you understand to trade spreads mirroring futures you need to enter at the bottom or top ⅓ price level of the spread depending on if you are buying or selling, and you understand you may need more than one spread to equal the value of the future.

The bid-ask spread is what you will immediately be down as soon as you enter the trade. If the spread between the bid price and the ask price is $3-4 then as soon as you enter you will be down that amount. It will start to change once the spread price moves in your favor. Obviously the tighter the bid-ask spread, the better. When you enter you should know where you plan to exit.

To figure an expectation of profit find the difference between your entry and exit price and subtract your bid-ask spread. Now you are armed with three tricks of the trade for trading spreads to mirror futures while taking advantage of the limited defined risk of Nadex Spreads.

If you would like to learn more about Nadex Spreads, go to www.apexinvesting.com. Apex Investing Institute offers free education, and free access to the Nadex Binary and Spread Scanner Analyzers. Member traders are invited to trade in the chat rooms, take advantage of trade signal services, have key indicators and access the Apex Forum. The forum content is updated daily and includes over 10,000 members. In a supportive learning community of seasoned as well as up and coming traders, traders of all levels learn how to trade Nadex binaries and spreads in depth, as well as futures, forex, stock and options, and gain an edge for successful trading overall.


Less then 40 min and DONE for the Day with $370 in profit!