By Darrell Martin
Nobody likes paying insurance premiums, but what if traders could collect insurance premiums?
A previous article examined how to profit with a premium collection trade using Nadex spreads in an uptrend or a flat market. Traders can also collect premium using spreads in a downtrend.
Premium collection trades are basically trades that collect money for time passing. Think of it like an insurance policy with 30 days on the policy.
Someone pays 30 days of premium to get coverage. After 30 days, they are out their premium and the insurance company has made it. Well, traders could be the “insurance company” per se. Traders could be the one collecting the premium, instead of the ones paying it when it comes to trading in the markets.
This is known as being a premium collection trader. Those who do this on Nadex can do it with completely defined risk. When markets are flat; when there is a lot of time still in a trade; when a trade is deep in the money; or when there is a lot of implied volatility, such as during news events – these are times traders can find premiums to collect.
What traders want is enough profit potential and premium to make money, when and if, the market stays flat, or if it moves slightly against them, and of course, if it moves favorably. That is when traders may collect even more!
Related Link: Excellent Leverage With Nadex Spreads, Compared To Forex Spot
With premium collection trades, traders will want to manage risk by knowing when to exit a trade in order to help balance out the risk to reward ratio. Due to this, it’s important to understand and know where the break-even point is, and where the 1:1 risk reward ratio is as of expiration, as well as while in the trade.
This article will use a Crude Oil Nadex spread as an example.
Crude Oil tends to be a volatile market and often has premium built into it. Notice also this spread has less than a day to expiration, as do all spreads on Nadex. This gives traders these opportunities on a daily and often multiple times in a day to do premium collection trades.
This particular spread is a good example to show premium and how the trade works. The key here is the price and its proximity to the underlying market. Remember, spreads have a floor and a ceiling level. When selling a spread, the distance between the entry price and the ceiling is the max risk, and the distance between the entry price and the floor is the max profit. Every tick on a Nadex spread is worth $1.00. Traders can do one spread, 100 spreads, 200 spreads, etc. – whatever the liquidity of the market allows.
Under max profit, there are 22 ticks of profit available. However, look at the proximity to underlying. It says 56. That means this spread’s price is 56 ticks above the current underlying market’s price. Said another way, the underlying market is already 56 ticks below the spread bid price of 103.24. Normally, the price would be below the spread’s price. If it was, that would be a trade where the trader is paying the premium instead of collecting it.
Traders have more potential profit doing a premium payment trade, but the market has to move favorably in order to profit. Using a trade that has an inverted proximity to the underlying (a positive instead of a negative number for proximity to underlying), traders can collect the premium if the market stays flat, goes down, or even moves up against them slightly.
Remember that this is a short. This means that since this spread was sold, the underlying would have to go up to the floor of the spread (103.00), before the trader could lose profit, or up 56 ticks to break even. Where would the 1:1 risk reward ratio be? The market would have to move up 56 ticks for break even, and then another 22 ticks, or 78 ticks total, for the 1:1 risk reward ratio point, at expiration.
Therefore, the market can continue down and the trader can make up to 22 ticks of profit. It can stay flat and the trader can profit up to 22 ticks. And it can move against the spread, up to the floor of 103.00, before the trader starts to lose profit as of expiration!
This trade allows for the opportunity of a profit potential of a bit over 4.5 percent on an investment in a single day.
Of course, traders don’t need to stay in the trade until expiration should it move in an unfavorable direction. Traders can exit earlier, potentially at the breakeven point, if enough time has passed; or, the 1:1 risk reward ratio point, depending on how much premium collected through time passing, or at any point chosen by the trader.
Traders can also take profit should it stay flat or move favorably to lock in profit. Premium collection trades can involve more risk, but if traders know ahead of time where they are going to exit and when, they can manage it within a trading plan.
For more information on Nadex spreads, how to trade them and get access to the free spread scanner, go towww.ApexInvesting.com. To practice trading spreads on a free demo account, go to ww.nadex.com and click on trading demo, trading account.
Apex Investing Institute gives free education, provides effective tools and a room community of seasoned as well as up-and-coming traders. Together in a supportive environment, along with tools for ease and convenience, traders of all levels can learn how to trade Nadex binaries and spreads, as well as futures, forex, stock and options, and gain an edge for successful trading overall. To learn more about how to trade spreads, binary options in-depth and for binary options signals, trading strategies, tools and trade rooms see www.ApexInvesting.com.