By Darrell Martin
To be successful a trader always wants to reduce risk, but also increase leverage.
Compared to many instruments out there, Nadex spreads allow for high leverage, thereby giving traders greater opportunities. Nadex spreads are a derivative contract of an underlying market – which has a limited, defined upfront, risk.
They are simple to trade because they don’t have all the complexities of the “Greeks”, like call and put options have. There is no reason for Nadex spreads to have these math complications, because they expire in a day or less and they get to what is called a “delta” of one almost instantly.
This series will compare the leverage of other instruments to the leverage obtained with Nadex spreads. For now, let’s examine differences in leverage, specifically between a Nadex spread and a futures option.
Related: Why Trade Nadex Spreads, Versus Future Options
Below is an example of a EUR/USD day trade of equalized size of $125,000. The instruments compared are the EUR/USD Future Options and EUR/USD Nadex Spreads. Both quantities have an equalized ratio for a leveraged value of $125,000: one contract for the EUR/USD Future Options and 12.5 Nadex Spreads.
However, it can be seen that the clear advantage is with Nadex, where only $250 is required for a 500:1 leverage. With the EUR/USD Future Options, a trader would have to put up $2500 for only a 49:1 leverage. They both have great leverage, but what about the risk?
Leverage can sometimes be a doubled-edged sword, because along with greater leverage traders may have a greater chance to lose money as well. In the last row, if price moved down, the loss would still only be $250 for the Nadex spreads, and a far greater loss of $1250 for the options.
Nadex has higher leverage and lower risk. Nadex clearly shows a lower loss here. The risk is capped on both the futures options and Nadex spreads. But since the spread has less time until expiration, traders are able to do a similar trade with less risk.
In addition, with the options, traders still risk or lose about half the money put up.
Profitability is also important. Having days until expiration, the delta is much lower on the futures option versus the Nadex spread. Therefore, if the trade were profitable, a trader would make only $463 on the EUR/USD or 6E CME option.
This is because with the option, there is the “delta” issue going on, where it moves slowly. The Nadex spreads, on the other hand, win the comparison again with a profit of $2875 for the same move in price.
To open an account, go to www.nadex.com and click on trading demo account or open live account.
See article on Benzinga