Spread Example: GBP/USD

Selling a Narrow Spread contract

This example looks at selling GBP/USD, and holding it until expiry. At expiry, the underlying market is outside of the Floor/Ceiling range and the example illustrates how Spread contracts can be used to limit your risk.

Which contract?

It is 9am ET. GBP/USD is trading in the Spot Forex market at around 1.4965. You think that the dollar will strengthen against the pound. This would cause a decrease in the level of GBP/USD, so you decide to sell a GBP/USD Spread on Nadex.

A choice of 4 different Spread contracts are available. You pick a Narrow Spread contract: this has a narrow contract range, which limits your exposure per contract.

You log into Nadex and view the Narrow Spread markets. Given the level of the underlying market, the 'GBP/USD 1.4800-1.5100 (3PM)' contract looks the most appropriate and you note the following:

  • Expiration: 3pm ET, same day
  • Underlying market: Spot GBP/USD FX market
  • Floor: 1.4800
  • Ceiling: 1.5100
  • Tick Size: 0.0001
  • Tick Value: $1

Making the trade

You place an order to sell 1 contract at of 'GBP/USD 1.4800-1.5100 (3PM)' at 1.4960. A few minutes later your order is filled.

The 'GBP/USD 1.4800-1.5100 (3PM)' contract has a Floor at 1.4800 and a Ceiling at 1.5100. This means that even if the underlying market moves beyond these levels, the contract will not be settled outside of this range.

You have sold at 1.4960, so the maximum possible loss on the trade is the difference between the Ceiling level, 1.5100, and your opening level, 1.4960 (or 1.5100 - 1.4960 = 0.0140). The Tick Size is 0.0001, so this represents a loss of 140 points. Spread contracts are worth $1/point, which means the maximum loss per contract is $140.

You are opening a position in a single contract, so the maximum amount you are risking on the trade is $140. You need this much in your account, plus any trading fees, in order to open the position.

Expiry and settlement

You leave your Nadex position open until it expires at 3pm. By now it is clear that your initial view was wrong, and GBP/USD has risen steadily in the Spot Forex market. 

The Expiration Value for GBP/USD is calculated from a set of trade prices in the Spot market as 1.5126. However, this is above the Ceiling value for the specific contract you have traded.

When the Expiration Value is above the Ceiling level, a Spread contract is settled at the Ceiling level. So the 'GBP/USD 1.4800-1.5100 (3PM)' Spread contract will settle at the Ceiling level of 1.5100.

Note: When you open a position, 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.

Calculating profit/loss

You sold 1 contract at 1.4960. Because the expiration value exceeded the Ceiling level, the Ceiling level of 1.5100 is used for settlement. The trading loss is equal to: 140 points (i.e. 1.5100 – 1.4960 = 0.0140) x $1 = $140.

To calculate your overall result, you also need to take account of any trading fees you paid to open the position and any settlement fees (Nadex clients do not pay settlement fees on Spread contracts that settle at a value of less than $1). 

Limited Risk

If you had made a similar trade without the protection of a Ceiling, then your trade would have been settled at 1.5126 and you would have lost an additional $26 (1.5126 – 1.5100 = 0.0026, or 26 points). Of course, under different circumstances Floor and Ceiling values can also limit your profits on a trade.