Spread Questions

#1

Btw - enjoyed the webinar last night good job. You really seem to be incredibly well versed in the nadex stuff. Not going to lie I see their potential but am still struggling to truly understand how to use them outside of a very controlled environment (i.e. the P3 service). I did check out the spread scanner and it looks like an awesome tool however.

On a side note, how would the nadex spreads (maybe binaries) best/most simply be used to “actually trade with”. Meaning for example if I am trading the GC futures market, and am coming up to an area of S/R that I like and have a strong feeling I would like to go either long or short at, what is the best way to use nadex products to mimic what I would typically be doing directly in the futures markets? I understand the concept of their use and have reviewed the basics but stick with me.

I see the ‘master spread’ tracks along almost to the tick of the underlying in most cases, which is great, but this is often a very wide spread and could be giving me the same or even more risk on each trade (albeit ultimately capped) than I would normally be assuming. Is it better to fumble around and try to find a shorter-term spread to trade either in advance or once the price gets to my level of interest (I won’t always know which direction I want until it gets there), either by using the scanner or just manually observing what is available on the nadex DOM? This gets back to my (dis)comfort with the shorter-term nadex contracts. They appear to sometimes track fairly close to the underlying, then don’t, then might again, etc. I understand they are derivatives and therefore have their own pricing model and are also affected by time…but my knowledge base here is very limited beyond the most basic concept. And then the time constraint itself for my trade also becomes a concern (therefore using a daily or master (is that weekly?)) possibly becomes more attractive, solving some of that, but then I am back to the much larger risk issue. Also in very fast moving markets like gold I am concerned with trying to manage too many moving parts and two different platforms/markets just to put a trade on when I need to make a split second decision.

Anyway, I will continue to explore the plethora of materials and videos on the site, you really have put a lot of great stuff out there which is awesome. Just hoping to get some additional insight if possible as I try to weigh the feasibility of actually using nadex to actively trade as closely as possible in a fashion similar to what I am used to normally doing directly in the underlying market (i.e. replacing execution on my ninja DOM/chart trader multiple times throughout the day with nadex execution to get the obvious benefits).

It?s a lot to take in at first.

Thanks!

#2

Watch the tutorial videos on nadex it will help you learn how to apply them

Side note - if thinking support resistance trading sytle (i don’t do this but the way i would apply it if i did where - i would use the ATM ITM binary so it does not have to move much) OR i would sell a spread to short or buy a spread to go long

i pretty much almost never trade the master spread… any spread where the market is near the center (ie put in .25 for risk/reward ratio on the scanner) will be almost exactly on track with the underlying - look at breakeven distance to find the closest spread to use define risk and often less margin you don’t have to choose a shorter one tthan the master except at night - after 8 AM ET - you can use the dailies - which expire the same time as the master spread and are decently wide

You also have the option of the ultimate hedge strategy - this allows you to still go short/long the gold futures with no cap - but with a large stop loss (granted if it moves against your future position the profit will be in nadex and not in your futures account so you will need the money in the account for the drawdown - but your true net loss will be very small - the scanner has the hedge be distance and hedge risk column to help with this and there is a tutorial on the ultiamte hedge strategy that goes into this strategy as well)…note often you are expecting it to reverse shortly after hitting support resistance so on this you don’t really need the widest biggest long lasting spread - 2 hours will usually do…as if you are right then you can just trail you stop to lock in profit and don’t need the hedge anymore - but if wrong you got a much larger stop loss at a much lower cost/risk level and can simply get out - say it goes 10 points against you etc…

the smaller spreads track the same as the larger ones - the basic pricing model you need to understand is simple - the closer it gets to expiration the less premium there will be…the closer the market gets to the center the less premium their will be…more premium is due to more time to expiration or being closer to floor ceiling…so a spread 22 hours a way close to floor ceiling will have maximum premium - but one 8 hours from expiration same distance form floor ceiling will have less - and one 2 hours from expiration same distance from floor/ceiling will have even less or none as it gets even closer to expiration

one with 22 hours in the middle will have little no on premium - one with 8 hours, 2 hour 10 minutes close to middle will have little to no premium

(this is similar to how one may look at a call or put option - the closer it is to the strike the more premium there is in the option - same on time) but without all the complexities of greeks as there is only 1 day or less till expiration so IV is low, theta is low as theta is the premium so you don’t need a number, and gamma will basically push your delta to 1 in seconds once the underlying hits the price you bought or sold the spread at - rho not being a factor with 1 day to expiration

There are no weekly spreads they would be to wide or to much premium in them to make them useful for trading

There really is no nadex Dom - there is their platform but good luck you will spend 5-30 minutes trying to find the best spread… with the scanner you can find it in seconds…that is why i had it made for my own trading…

If doing ultimate hedge there is the short gold long spread and you are closing both when it goes against you or letting the spread expire worthless as gold is moving in your favor and locking in profits

Hope that helps…

Darrell

#3

Extremely helpful, thank you!

So in our gold example below, whether playing a binary, spread or ultimate hedge (involving both future and spread), would you wait until the underlying reaches the desired level to employ one of those strategies, or would you try and set up something in advance of the market moving there (but knowing where you wanted it to move to ahead of time)?

Also, does it ever make sense in your opinion to try and straddle (spreads) or strangle (binaries) a major support/resistance level…or you reserve that technique only for expected/possibly wild moves in one direction (or both), involving only something as volatile as a major news announcement or external/fundamental event?

Ok now I have another question regarding a different strategy/technique. Would love some insight. Let’s say each day in the ES, just as an example, you have daily target projections both long and short that have proven to be very accurate for roughly 5+ point avg moves each day in one direction or the other (most days). Your analysis establishes these target levels when the market opens at 9:30a est, but right at that time you do not know yet which way the market will go.

Would it be reasonable to try playing a straddle spread strategy on the dailies (8am-4:15pm) to try and catch the move whichever way it ultimately moves? I think there are 3 dailies available from 8am to 4:15pm (30pts) for the ES, and I’m thinking right at 8am you could buy the long very close to the floor of the upper ‘box’ and sell a short very close to the ‘ceiling’ of the lower box, theoretically giving very favorable R:R. If memory serves it’s a good time to get very close to the edges right when these things open. Then at 9:30am, when you have your targets determined, you could set your take profits accordingly and just let the trades play out. The timing would be perfect as well - spread vs underlying - coinciding with the underlying market and allowing time for the bigger moves to play throughout each day.

Question is will the premium, as discussed below in your previous response, alter the movement of the spreads too much to allow it to coincide with the targets being hit on the underlying? Meaning would you typically have enough profit in the spread from a 3-5pt+ move in the underlying to cover both the opposing spread as well as its own BE requirement by exiting the spread at whatever price/time the actual underlying market hit its target? Not sure what the difference in movement might be on the dailies versus underlying having entered so close to the edges and with a lot of time left (i.e. how “bad” the premium would be…pushing it unfavorably away from the underlying). Also, would you enter a take profit based on the actual underlying price target…or should you just wait until the underlying target is hit and then exit the spread wherever it happened to be locally at that moment (assuming it had at least moved favorably in your direction, but was perhaps some distance away from the underlying due to premium)? Does this make sense what I’m asking? Sorry it’s a lot of moving parts…

On the other hand, playing the daily ‘middle’ box in one or both directions would probably track closer to the underlying (reducing effects of premium), but would also greatly increase the risk on each trade which is less attractive and would probably require something equivalent to a +/-3pt stop in the ES (although I guess could still potentially be or be better than a 1:1 in most cases…assuming 3-5pt+ targets on the underlying).

Or…as an alternative would you just wait until the market opens and attempt to let it show it’s hand (i.e. complete first major swing, allow MAs to confirm direction, penetrate major S/R, etc…whatever analysis you may be using in your method), and then simply try to play just one directional spread (or binary?) in the direction you feel the market is headed at that time? So actually trading the price action instead of just setting up a wide straddle and letting it run at the open. I guess you could also employ more flexibility/options in terms of strikes/times if you waited for the market to open as well, also perhaps setting limit orders above/below market trying to let the market take us in at a better price (like we do on P3 to a degree). Lots of options.

But…the simplicity of being able to just set and forget a straddle each day at 8am with tiny risk, and letting the market ultimately make one larger move for the day as it wants, would be awesome…truly enjoying the benefits of what the nadex products offer. Unfort this may also not be feasible based on how the spreads move, are timed, and if playing one in each direction at the same time.

Thoughts? I will definitely continue reviewing all of the nadex vids and materials on the site as well, as there is a ton of great info. These are just some more specific thoughts/questions I was having and wanted to take advantage of your incredible degree knowledge on this topic.

Thanks again, really is appreciated!

#4

[quote=mr1850]Extremely helpful, thank you!

So in our gold example below, whether playing a binary, spread or ultimate hedge (involving both future and spread), would you wait until the underlying reaches the desired level to employ one of those strategies, or would you try and set up something in advance of the market moving there (but knowing where you wanted it to move to ahead of time)?[/quote] Not sure what your asking here. But when i get an entry signal I enter the trade.

[quote=mr1850] Also, does it ever make sense in your opinion to try and straddle (spreads) or strangle (binaries) a major support/resistance level…or you reserve that technique only for expected/possibly wild moves in one direction (or both), involving only something as volatile as a major news announcement or external/fundamental event?[/quote]

It is a strategy you could try. However, often markets will just sit as support/resistance levels. A straddle or strangle really is a volatility strategy where you expect the market to move a lot in one direction or another. On news you expect volatility. At support or resistance you expect the market to either break through or fall back…but it may take a while as it may go flat. If you are truly playing support or resistance then you would want to be more directional

[quote=mr1850] Ok now I have another question regarding a different strategy/technique. Would love some insight. Let’s say each day in the ES, just as an example, you have daily target projections both long and short that have proven to be very accurate for roughly 5+ point avg moves each day in one direction or the other (most days). Your analysis establishes these target levels when the market opens at 9:30a est, but right at that time you do not know yet which way the market will go.

Would it be reasonable to try playing a straddle spread strategy on the dailies (8am-4:15pm) to try and catch the move whichever way it ultimately moves? I think there are 3 dailies available from 8am to 4:15pm (30pts) for the ES, and I’m thinking right at 8am you could buy the long very close to the floor of the upper ‘box’ and sell a short very close to the ‘ceiling’ of the lower box, theoretically giving very favorable R:R. If memory serves it’s a good time to get very close to the edges right when these things open. Then at 9:30am, when you have your targets determined, you could set your take profits accordingly and just let the trades play out. The timing would be perfect as well - spread vs underlying - coinciding with the underlying market and allowing time for the bigger moves to play throughout each day.

Question is will the premium, as discussed in your previous response, alter the movement of the spreads too much to allow it to coincide with the targets being hit on the underlying? Meaning would you typically have enough profit in the spread from a 3-5pt+ move in the underlying to cover both the opposing spread as well as its own BE requirement by exiting the spread at whatever price/time the actual underlying market hit its target? Not sure what the difference in movement might be on the dailies versus underlying having entered so close to the edges and with a lot of time left (i.e. how “bad” the premium would be…pushing it unfavorably away from the underlying). Also, would you enter a take profit based on the actual underlying price target…or should you just wait until the underlying target is hit and then exit the spread wherever it happened to be locally at that moment (assuming it had at least moved favorably in your direction, but was perhaps some distance away from the underlying due to premium)? Does this make sense what I’m asking? Sorry it’s a lot of moving parts…[/quote]

[b]Yes the spread strikes are set between 5 and 30 minutes usually before the open (you can even see them but not trade them before they open so you will know how close the market will be to the floor ceiling).

The risk reward ratio would not be there as much as you might think though the markets are very efficient. You could do this strategy however you have to look at the premium built in. ie say there is 2.5 points to breakeven distance on both sides then when it hit your 5 pt move you would be at breakeven (down 2.5 on one side and up 2.5 on the other). On a straddle/strangle you want to at least make a 1:1 so you want the market to move your total risk + the risk on the other side to ensure a 1:1 risk/reward ratio. Implied volatility is built into the spreads so often this strategy for regular volatility would be hard to simply put on and have it hit as it may just move up and down 5 pts now if it did both - down 5 and up 5 then you could end up at a 1:1 but if it only went in one direction then you would be at breakeven. The strategy could be expect the oscillation where if it moves down 5 you exit the short side at a 2.5 pt profit covering all the risk on your long side so there is no “risk” in the trade then if it moves back up you are able to lock in a nice 1:1 profit. This would be a more realistic strategy where the goal is to profit or breakeven on the trade.

You could also manage one side of the trade that it breaks to so say it really starts moving short instead of just taking off the profit at the “breakeven point and counting on isolation” on that one side you could trail the stop down…but this would require babysitting where you need to be there and ready to exit when called for (ie using the apex powerlines & apex 10 minute deviation stop method[/b]

#5

[quote=mr1850] On the other hand, playing the daily ‘middle’ box in one or both directions would probably track closer to the underlying (reducing effects of premium), but would also greatly increase the risk on each trade which is less attractive and would probably require something equivalent to a +/-3pt stop in the ES (although I guess could still potentially be or be better than a 1:1 in most cases…assuming 3-5pt+ targets on the underlying).[/quote]

[b]Correct playing the “middle box or ATM box” basically the box where the underlying is in the middle is the easiest way to use the spreads to mirror the underlying as there is very little premium if any whether 20 hours or 20 minutes to expiration. The longer the spread has to expiration from its open ie 22:15 versus 8:15 versus 2 hours the wider it will be. So using the ones that start at 8 will be less wide therefore less margin requirement. Same thing on the 2 hour even less wide (but also less time to expiration) so on the 2 hour its a matter of how long you think the move will take. It is important to note that this is still often less risk than the underlying futures or forex.

Also max risk does not mean that is what your actual risk has to be. Just like when trading normal futures/forex stocks your max risk is either infinite up if short or down to zero if long but with a stop loss … so max risk does not have to mean your actual risk.

You could simply use a simulated stop loss and exit the trade if it hits your stop level. I am covering this in a webinar on Tuesday. This would allow you to use less margin, have defined risk, and trade a smaller size (ie in the case of futures). One strategy you can use is like the one I showed on GBP/JPY on Thursdays webinar where i covered this strategy and the market analyzer. I showed using the middle spread and as the market moved in your direction then hedging it with the lower spread. This will then eliminate your need for a “stop loss” as the lower/upper spread would become your stop loss. It may cost you a little (ie $5 or $10 but would greatly reduce your risk. I also cover this in the how to make your own spread video tutorial under tutorials, nadex, spreads. In the tutorial i cover how to get a low risk spread when there is not one in your direction…but it also can be used to turn a middle spread (more correlated with less premium) into a low risk spread by legging in. You simply enter the trade and are willing to take a stop on it. But when/if it moves a bit in your favor you add in the lower/upper spread as the hedge (you could even set in a limit order to say sell the lower spread but at a higher price so it would automatically kick in for you if the spread moved in your favor or if enough time elapsed and reduce the premium to make it cheap enough. [/b]

[quote=mr1850] Or…as an alternative would you just wait until the market opens and attempt to let it show it’s hand (i.e. complete first major swing, allow MAs to confirm direction, penetrate major S/R, etc…whatever analysis you may be using in your method), and then simply try to play just one directional spread (or binary?) in the direction you feel the market is headed at that time? So actually trading the price action instead of just setting up a wide straddle and letting it run at the open. I guess you could also employ more flexibility/options in terms of strikes/times if you waited for the market to open as well, also perhaps setting limit orders above/below market trying to let the market take us in at a better price (like we do on P3 to a degree). Lots of options.[/quote]

I use the apex method to trade direction. Here is ES from today: http://screencast.com/t/Bjk5OZky “http://screencast.com/t/Bjk5OZky”

[quote=mr1850] But…the simplicity of being able to just set and forget a straddle each day at 8am with tiny risk, and letting the market ultimately make one larger move for the day as it wants, would be awesome…truly enjoying the benefits of what the nadex products offer. Unfort this may also not be feasible based on how the spreads move, are timed, and if playing one in each direction at the same time.[/quote]

Either way you would need a take profit don’t set and forget and don’t set take profit. You could like i mentioned earlier set a take profit on both sides where it makes the risk of the other side you are at break even if it oves far enough in either direction and if it oscillates you make 1:1. This would be about as close to set and forget as you would get.

[quote=mr1850] Thoughts? I will definitely continue reviewing all of the nadex vids and materials on the site as well, as there is a ton of great info. These are just some more specific thoughts/questions I was having and wanted to take advantage of your incredible degree knowledge on this topic.

Thanks again, really is appreciated![/quote]

Great questions hope this helps :slight_smile: