Learn Spread Contracts

Spread contracts have a variable payout that lets you take a short-term position on the direction of a market. Their simple structure allows you to trade on where the price will go, while limiting your exposure to extreme price changes.

Underlying market

Spread contracts are settled on the basis of an underlying market. This is generally a Futures market; for example, our Crude Oil Spread contracts are settled based on NYMEX* Crude Oil Futures prices. For more details, see Contract Specifications.

So, when you buy a Spread contract you are taking a position that the underlying market will be higher when the contract expires. And conversely, when you sell a Spread contract you are speculating that the underlying market will be lower at the time of settlement.

Limited risk: Floor and Ceiling

Every Spread contract has both a Floor and a Ceiling associated with it. These represent the minimum and maximum levels at which the Nadex contract can be settled, no matter how far past either level the underlying market may have moved. The Floor and Ceiling values for each individual contract remain constant throughout the life of that contract.

Because the settlement range of a Spread contract is rigidly defined, the maximum possible loss (or profit) is always known in advance.

Contract Ranges

Nadex offers various spread contract ranges. The first contract we offer, the Master Spread, has a larger distance between the Floor and Ceiling levels. For example, our Crude Oil Spread might have a gap of 1000 points between these levels, with a Floor at 70.00 and a Ceiling at 80.00.

The other three contracts, called the Narrow Spreads, each have a smaller distance between the Floor and Ceiling. They are staggered in overlapping ranges to cover the full range of the Spread contract. If our Spread contract for Crude Oil had a range of 1000 points from 70.00 to 80.00, the three Narrow Spreads would each have a range of 500 points as follows:

(a) Floor: 70.00, Ceiling: 75.00
(b) Floor: 72.50, Ceiling: 77.50
(c) Floor: 75.00, Ceiling: 80.00

Contract size: $1 per point

All Spread contracts are defined such that a 1-point (or 1-tick) movement means a $1 profit or loss per contract. For example, if you bought 5 contracts and later sold them for a 35-point gain your profit would be 5 x 35 x $1 = $175. Likewise, if you bought 10 contracts that were settled at a 19-point loss, you would lose 10 x 19 x $1 = $190.

So whenever you trade a contract, you know that a 1-point movement is worth $1 per contract to you.

The definition of a 'point' varies between different underlying markets. For example, Crude Oil is priced in dollars and cents, i.e. $71.58, whereas the Wall Street 30 is quoted as a whole number, i.e. 10625. In each case, one point is a movement in the last digit, i.e. $0.01 for Crude Oil and 1 index point for the Wall Street 30.

To view the value of a 'point' for a given underlying market, please refer to the Tick Size value in the Stock Indices, Forex, and Commodities contract specifications.

Trading Spreads

When you open a position in a Nadex contract, you do not have to hold it until expiry. You can log into the platform and enter an order to close, or partially close, your position at any time until expiry.

Funding

Nadex requires you to fund the maximum risk of any trade before the position can be opened. This maximum risk is defined as the difference between your order level and the Floor level (for buyers) or Ceiling level (for sellers) - so these levels determine the funds needed to open a trade.

Comparison with underlying market

For the Master Spread contract, the large Floor/Ceiling range means that the underlying market will generally be trading between these values. Therefore the price of the Master Spread contract is likely to be easily compared with the underlying market.

In the case of Narrow Spreads, the closeness of the Floor and Ceiling levels means that the underlying market might be trading near (or outside) these levels. This results in prices that reflect a much higher degree of optionality and are harder to compare with the underlying market.

Summary

Range No. of contracts Optionality Funding requirement
Spreads Wide 1 Low Higher
Narrow Spreads Narrow 3 High Lower

Expiry and settlement

Consider a Crude Oil Spread contract with a Floor of 70.00 and a Ceiling of 80.00. When this contract reaches expiration and is settled against the underlying market, there are three possible scenarios:

  • Expiration Value is at or below $70.00: contract is settled at the Floor value of 70.00
  • Expiration Value is between $70.00 and $80.00: contract is settled at the corresponding value between 70.00 and 80.00
  • Expiration Value is at or above $80.00: contract is settled at the Ceiling value of 80.00

Note: Floor and Ceiling values only apply to settlement, they do not act as Stops or Limits and cannot trigger a position to be closed.

 

*NYMEX is a registered service mark of the New York Mercantile Exchange, Inc. Nadex, Inc. is not affiliated with the New York Mercantile Exchange, Inc. and neither the New York Mercantile Exchange, Inc. nor its affiliates, sponsor or endorse Nadex, Inc. or its products in any way.