Explain proximity, premiums and hedging

#1

Can you answer some questions for me.

  1. at what point do you make money in spreads? originally, I thought you made money if the indicative was in the area between where you bought and the floor or ceiling? for example if the spread was floor 1.2400 and ceiling 1.2500 and you purchased at 1.2410 then you made money if the indicative was between 1.2410 -1.2500. yet, I was confused by the webinar on proximity where it was said proximity is determined by where you buy and the indicative. I thought when you buy a spread the purchase price is the indicative. please explain.
  2. explain how spreads were hedged with binaries in the webinar ins and outs of nadex spreads. how did he do so well with those spreads and how did he determine where to buy and sell the binaries.
  3. please explain the math behind premiums and proximities. in the proximity webinar he said proximity is the difference between indicative and purchase and i guess multiplied by 10 representing pips. the proximities were labeled with a $. yet, in the premium webinar, premiums are labeled a $ and not proximities. in addition the math for proximities did not add up. thanks
#2

Hi Jospeh, great Questions. Couple of things: 1.I would recommend to watch the Ins and Outs of Spreads one more time. It sometimes can take watching it a few times to really put all the pieces together. I know when I was new to spreads I had to watch videos a few times and then demo them for a bit to really get a handle on it 2. Make sure you are using the new Spread Scanner as it lays everything out for you and makes it much easier to understand and trade spreads 3. If a Spread is 1.2400-1.2500 and you buy in at 1.2410 that does not always mean the underlying is at 1.2410. if you look on the scanner or even the nadex platform you will see that there are a lot of different spreads avail. Log on now and check it out, you will several avail, and you will see the bid and offer. meaning where you can buy or sell that particular spread. You will see that some bid /offers are right close to the current underlying and some are further away. This is what is called proximity, how far away is the price you can buy or sell the spread at compared to where the underlying is. If you buy or sell a spread that is further away from the underlying it can take some movement before that spread starts becoming profitable in your PnL and before you start seeing it move $1 per tick with the market. if you buy or sell at spread that has a bid /offer RIGHT AT the current underlying you will see it move like and mirror the underlying more. So proximity just lets you know how far away from teh current underlying you can buy or sell that particular spread at. The further away, the slower it will move. So, no, where you buy or sell a spread at is not the same as the underlying. It is based on the bid or offer price of that spread, it is not always at the same exact as the underlying. Premium is where you can buy a spread LOWER than where the market is. For example at spread is 1.2400-1.2500 The underlying is at 1.2450 and you can buy a spread at 1.2430. So you can buy the spread 20 ticks lower than where the market is. So if the spread expires at 1.2470 What to you get? Do you get the difference of 1.2570-1.2550? Since the market was at 1.2450 when you bought it? Do you get $20? No, you would get $40. because you bought it at 1.2430. At expiration you get the difference of where you bought it for, compared to where it expired. Again, look at the platform or the scanner and see the different spreads avail and the prices avail to buy or sell them at. Hopefully this helps you out some!