Binary Options Brokers - Nadex Review

Nadex, the North American Derivatives Exchange, is the first government-regulated retail exchange for simplified derivatives. The company was formerly known as HedgeStreet. Nadex is a subsidiary of IG Group, which operates one of the UK's largest spread betting firms.

Nadex offers binary options and spreads for a variety of markets, including stock indices, commodities, forex, and economic events such as unemployment numbers and rate decisions. The spot forex market is used as the underlying market for forex derivatives. For indices and commodities derivatives, an equivalent futures markets is used.

Intraday, daily and weekly binary options are available. You must be a US resident to open an account at Nadex. There is no minimum deposit, but it is recommended that you have at least $1000 in starting capital. You can sign up for a free demo account with no set expiration period. This will give you ample opportunity to learn the platform and test trading strategies.

The Nadex Trading Interface

Let's take a look at the Nadex trading interface. Instruments are grouped by market and type in the Finder window to the left. The list of instruments appears in the Markets window to the right. Under the Contract column in the Markets window, the security is listed along with the strike price for binaries (or the upper and lower bounds for spreads), along with the expiration time. All expiration times are Eastern Time.

Immediately to the right of the contract description is a Quick Chart icon that brings up a chart showing the day's price changes. There is also a drop-down menu with several choices. The Expiry column lists the expiration date. The Bid and Offer columns are the selling and buying prices, respectively. The Bid Size and Offer Size columns show how many contracts are available to buy or sell. Finally, the Update column show the time of last price update.

To place an order, simply click on the contract name in the Contract column. The Ticket window will appear. At the top, you'll see the current Bid and Offer prices. You can click on either price to fill the Price field automatically. Click the arrow next to the Direction box to select Buy or Sell. Select the number of contracts in the Size field, enter an opening price in the Price field, and your maximum profit and loss will be displayed below. A single Nadex contract is $1 per point.

The dollar amount listed in the Max Loss field is the initial investment you'll need to fund the order. This amount must be currently available in your account balance. This ensures that you will never owe additional funds beyond your account balance.

All orders in Nadex are limit orders, which means that they are filled at the specified price or better. If you entered the current Bid or Offer price when placing your order, it should be filled shortly. Otherwise, you can place pending orders in the hopes that they will fill at favorable prices.

Currently opened orders are shown in the Open Positions window, while unfilled orders are listed in the Working Orders window. All orders will expire at the contract expiration time.

You can close a position at any time before expiration, simply by placing an equivalent order in the opposite direction. You can do this easily by clicking the contract name in the Open Positions window. A Ticket window will open with the fields already pre-filled. To close the order immediately, simply submit the order at the current Bid or Offer price. You can also set a pending limit order in the opposite direction, in effect creating a stop loss.

You are subject to the Bid/Offer spread when exercising an option before expiration. You will also be charged a second order fee for the opposite position. The Bid/Offer spread is the difference between the Bid and Offer price. Contracts are bought at the Offer price, and sold at the Bid price. The difference between the two prices is kept by the broker as commission.

The Bid/Offer spreads on Nadex and IG Markets are fairly wide, so excessive pre-expiration trading is expensive and therefore discouraged. You can still close trades before expiration if necessary, but keep it to a minimum to avoid paying too much in commission.

Nadex Contract Types

Binary Options

Nadex's binary options are quoted between 0 and 100. The higher (or lower) the price, the greater the probability that the final closing price will be above (or below) the strike price. If a binary option expires in-the-money, the payout is $100, minus fees. There are no fees for options that expire out of the money.

A price near 100 means that the probability is high that the expiration price will be above the strike price. Likewise, a price nearer to 0 means that the probability is high that the expiration price will be below the strike price. A price of 50 means that the underlying security's current price is very close to the strike price, and could go either way.

When buying a binary option, you are wagering that the expiration price will be above the strike price. If so, the settlement price will be 100. When selling a binary option, you are wagering that the expiration price will be below the strike price. If so, the settlement price will be 0. There are two factors that determine the price of a binary option: the relationship between the underlying security's current price and the contract's strike price; and the time remaining until expiration.

When there is a sufficient amount of time until expiration, a wide variety of contracts at different strike prices will be available. As the expiration time draws closer, outlying contracts will gradually settle at 0 or 100, and a smaller range of strike prices will be in play. Buying a binary option at a lower price means less risk and greater reward, but also a lower probability that the option will finish in the money.

For example, if you buy one contract of a binary option at 30, your maximum profit will be $70, and your maximum loss (and your premium for this trade) will be $30. You only need to win one out of every three trades at this price to make a profit.

Buying a binary option at a higher price means a greater probability that the option will finish in the money, but also greater risk and less reward. If you buy one contract at 70, your maximum profit is $30, and your maximum loss is $70. More than likely, you will profit from this trade, but it takes only one loss to wipe out three winners at this price.

Spread Contracts

Nadex also offers spread contracts. Like a binary option, a spread contract pays out when the underlying security closes higher or lower than the purchase price. A spread contract has an upper and a lower bound. The current purchase price lies somewhere between these bounds, and the total profit or loss for any transaction is based on the initial purchase price.

Unlike binary options, spreads are not an all-or-nothing wager. Your profit or loss is determined by the difference between the purchase price and the expiration price, up to the maximum profit or loss as defined by the upper and lower bounds of the contract.

For example, let's take the spread contract Wall Street 30 (Mar) 10400.00 to 10500.00 at 3PM. "Wall Street 30 (Mar)" is the underlying market (in this case, the CBOT E-mini Dow Futures), 10400.00 is the lower bound, and 10500.00 is the upper bound. 3PM is the expiration time.

The current Bid and Offer prices for this contract will lie somewhere between 10400 and 10500, depending on the current price of the underlying security, the demand for this contract, and the time remaining until expiration. If you buy one lot of this contract at 10450, your maximum profit will be $50, and your maximum loss will be $50.

If the expiration price at 3PM is 10480, then your profit is $30. If the expiration price is 10520, then your profit is limited to the maximum profit of $50. If the expiration price is below your purchase price, then your loss is calculated accordingly up to the maximum loss.

Nadex's spread contracts consist of two types – the master spread, and five narrow spreads. The master spread for forex contracts ranges anywhere from 300-750 points. The narrow spreads subdivide the master spread into five smaller, overlapping spreads, ranging from 100-250 points each for forex contracts.

Nadex's spread contracts are similar to the spread bets offered by UK firms, with a few exceptions. One difference is that Nadex spreads have a clearly defined floor and ceiling price, which limits the total profit and loss. Another difference is that Nadex spreads do not have stop losses. While spread bets are often traded on margin with leverage, Nadex does not offer leverage on their products.

Due to the larger spreads, it may be necessary to put up a larger premium to trade a spread contract than you would for a binary option. The profit or loss for a spread contract can be significantly larger than a binary option for the same contract size.

The major difference between spreads and binary options is that spreads do not expire at their maximum profit or loss. The total profit or loss per trade is dependent on the difference between the settlement price and the purchase price. On a binary option, if the settlement price is even one point below your purchase price, the contract settles at zero and the full maximum loss is incurred. Whereas for spreads, you only lose the difference between the settlement price and the purchase price, up to the maximum loss.

Spreads offer a different risk profile than binary options, and it is up to you whether you want to trade them. Binary options offer a wider variety of time frames (intraday and weekly), and have a more consistent risk profile. Some of the strategies you'll learn for trading binary options can be applied to spreads as well.