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  1. #1
    Legendry Member Michael Hodges's Avatar

    NADEX Prices - How Do They Work? !!!

    The prices we pay at NADEX are by far the most confusing aspect of trading there but not to worry, this thread is dedicated to discussing HOW NADEX options are priced and issues, questions to that effect.

    to start I'm going to lay down the basics, we can move on from there.

    1 - NADEX options are binary, if you hold it until expiry it will be worth $0 or $100. Your loss if it is worth $0 is the price you pay, your profit if it is $100 is the difference between what you paid and $100. If you pay $50 for the option and it expires OUT OF THE MONEY at $0 you lose $50. If the option expires ITM at $100 you profit $100 -$50 = $50.

    2 - The options at NADEX are listed by strike and by expiry. The prices of the different strikes is determined by the price of the underlying asset and WILL CHANGE as the price of the asset changes. For example, if the $45 strike for OIL is $50 when Oil is at $45 it will gain value when the price of oil moves up and lose value when the price of oil moves lower. The more the price of oil moves the more the value of the strike will change. For example, you bought the $45 strike for oil when oil was at $45, it cost $50. The price of oil then moves up to $47.50 and the $45 strike/option for oil becomes in-the-money and its value can increase up to $100.

    3 - You can sell you NADEX options any time you want. Lets go back to the example in #2. You buy the $45 strike for $50, oil moves up to $47.50 and the option goes up to $75. It is still two days until expiration (lets assume we're using end of the week) but that doesn't matter because you can sell when you want, all you have to do is go into your account and click on the options you own and enter a sell to close order. Your profit will be $75-$50 or $25. Not as much as $50 like if you held to expiry but better than $0.

    4 - The price you pay for the NADEX options is directly related to how much your profit is. The more you pay, the less profit you make but even if you pay as much as say $65 for an ALREADY IN THE MONEY option your profit is still $35 or 53%. If you pay only $50, which is what it usually costs when the asset price is EQUAL to the strike, also called AT THE MONEY, your profit will be $50 or 100%. The thing to keep mind is that the only thing that really matters is if the strike is in the money or not at expiry, to get
    the $100.

    I'll talk some more about buying/selling nadex in the next post.

  2. #2
    Legendry Member Michael Hodges's Avatar

    Sell To Open, Then Buy Back At A Profit !!!

    I want to talk a little about 2 things today. Bearish positions and closing a position early at a profit.

    1) bearish positions at NADEX are a little different. You don't buy a put, there are no calls and puts at NADEX only Lots. Lots are bought when you think their price will go up, they are sold when you think the asset price will go down. Specifically, you SELL TO OPEN this position. That is, you open a position in which you take a bearish stance, sell the option at a "high" price and intend to buy it back later or let it expire out of the money. When you sell you get the BID price, this is the price that a buyer is bidding to buy and the price you will get, also known as the sell price. Later, when you want to close this position you must buy it back, specifically, you BUY TO CLOSE the position.

    2) now, in either case, buy to open or sell to open, it is possible to close those positions before expiry and make a profit. The only requirement is for the asset price to move enough to alter the price of option you have bought, enough to overcome the spread between the bid and the ask. Take for example this trade set-up I made today where I sold to open the 2152.50 strike when asset price was at the money. I received $50.50 for those lots. When the market opened asset prices tanked, the SPX fell more than 20 points, and that same strike lost value and could be repurchased at a lower price. In this case that price is near $30 or about a $20 profit per lot. Sold to open at $50.50, bought to close at $30.50, you received $50.50 then gave back $30.50 and kept $20.

    Link to the original trade set up.

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  3. #3
    Legendry Member Michael Hodges's Avatar

    Market Pressure And NADEX Pricing !!!

    today, The great thing about NADEX options is that market pressure helps dictate the prices. This means that there can be big moves in price on small moves in the underlying, and vice versa, and there are ways to make money on the spreads between the bids and asks of the different strikes, and the prices of the different strikes can become quite close together even when the strikes remain spread apart.

    One area of confusion, and something I was reminded of a few minutes ago when reading another post here in the NADEX forum, is that sometimes this market pressure can mean that the option isn't showing much profit, even when it should be. What we as traders need to remember is that the price action of the strikes only has meaning when while the options is open, while it is being actively traded, all that matters is if the option will close IN THE MONEY or OUT OF THE MONEY. It doesn't matter if the option is only showing a value of $60 after moving firmly in your direction so long as it is ABOVE your strike price, if that is the case you will get Full MAXIMUM RETURN at expiration, all you have to do is hold your option until expiration.

    Look at the shot of the US 500 weekly ladder below (the ladder is the list of all strikes with weekly expiry for the spx). The 2195.5 strike is firmly in the money and yet it only sells for $65, WTF? Market pressure, that is what people are willing to buy and sell it for at this time, even though it is really worth $100 so long as it stays ITM. What this really shows is a smart opportunity for savvy traders to buy an ALREADY PROFITABLE OPTION at a great discount, who wouldn't want that, all you have to do is hold it until expiry.

    Click image for larger version. 

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  4. #4
    Legendry Member Michael Hodges's Avatar

    A Thought On Pricing, Limit Orders And Account Management !!!

    I was thinking about risk/reward, the pricing structure of NADEX options, using limit orders and my account management and came up with this idea. As an added element of my risk management I am going to start using limit orders and a specific price per lot in order to help ensure long term profitability. This is what I've come up with. Because the options prices fluctuate, and because you can use a limit order, and due to the $0-$100 payout structure if I target options and aim for an entry price per lot of $40 it means I only have to be 40% right in terms of trading in order to hold break-even in terms of account value (not counting commissions)and 50% is enough to make profits. If I am 60% right then I am guaranteed 50% return on investment; 5X$40=$200, 3 wins is 60% so $300/$200=1.50 or 50% ROI.

    The risk I add is that all positions will be purchased when the option is out of the money, this means that in order to profit they will have to move at least a little bit to be ITM and profitable. Based on my Communitraders long term win/loss rate I am confident I can do it.

  5. #5
    Legendry Member Michael Hodges's Avatar
    Quote Originally Posted by Michael Hodges View Post
    I was thinking about risk/reward, the pricing structure of NADEX options, using limit orders and my account management and came up with this idea. As an added element of my risk management I am going to start using limit orders and a specific price per lot in order to help ensure long term profitability. This is what I've come up with. Because the options prices fluctuate, and because you can use a limit order, and due to the $0-$100 payout structure if I target options and aim for an entry price per lot of $40 it means I only have to be 40% right in terms of trading in order to hold break-even in terms of account value (not counting commissions)and 50% is enough to make profits. If I am 60% right then I am guaranteed 50% return on investment; 5X$40=$200, 3 wins is 60% so $300/$200=1.50 or 50% ROI.

    The risk I add is that all positions will be purchased when the option is out of the money, this means that in order to profit they will have to move at least a little bit to be ITM and profitable. Based on my Communitraders long term win/loss rate I am confident I can do it.
    One thing that will affect this approach is that not all orders will get filled, so that needs to be taken into account when tallying the win/loss and overall profitability.

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  7. #6
    Legendry Member Michael Hodges's Avatar
    NADEX prices are awesome in weeks like this one where all 5 of my NADEX tips are losing money. I am going to close them all, save whatever money I can, and wait until next week to start all over again.

  8. #7
    Legendry Member Michael Hodges's Avatar

    Partial Fills !!!

    NADEX prices are awesome because of partial fills. YOu can enter a price and number of lots for a position, using a limit order, and you will get your order filled as best they can. In the worst instances you will get no part of the order filled and that sucks, but, if price dip down to your price point and someone wants to buy/sell with you then you may get a full order fill, or a partial. This is because of market pressure and how many people are at a level wanting to do business. If you want to buy 10 and someone else wants to sell 5 you will get a partial fill for 5. The market makers are supposed to help cut down on this, guaranteeing fills at price if the market moves that direction, but some trades still slip through the cracks especially when price action on the lots is hot.

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  9. #8
    Junior Member alexhiggins's Avatar
    Thanks for the good information. I have practised with Nadex demo just a few days, but already I find it very good. Being able to buy and sell and change your orders almost any time and any way you like, opens a whole new scenery to the binary option world. For me Nadex is the way to go.

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  11. #9
    Legendry Member Michael Hodges's Avatar
    here's a video I just did explaining how NADEX prices work, the 0-100 pay out thing.


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