What are Bull Spreads
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WHAT ARE BULL SPREADS?
A Bull Spread is a simple derivative with built-in floor and ceiling levels that define the lowest and highest points at which it can settle.
This means you’ll always know your maximum potential loss and profit from the outset.
Bull Spreads are short-term contracts, settled based on an underlying market, making them suitable for hedging against movements in that market. Nadex offers Bull Spreads on the following:
- Stock indices
How do Bull Spreads work?
A typical Bull Spread might have a title like this: EUR/USD 1.3000-1.3250 (3PM). The figures represent the floor and ceiling levels for the contract.
In this example, your trade will settle based on the underlying EUR/USD spot rate, but because of the contract’s floor and ceiling, that can be no lower than 1.3000 and no higher than 1.3250, at 3pm.
To open a position, you buy or sell at Nadex’s prevailing bid or offer price. This is based on the spot EUR/USD rate, and will be somewhere inside the floor/ceiling range. You buy if you think the price will rise, sell if you think the price will fall.
During the life of the contract, the underlying market can move for or against you, but the floor and ceiling levels shield you from movements beyond these predetermined limits.
This Bull Spread example will settle at:
- The spot rate if it is between 1.3000 and 1.3250 at expiration
- 1.3000 if the spot EUR/USD rate is lower than 1.3000
- 1.3250 if the spot EUR/USD rate is higher than 1.3250
Nadex offers a range of contracts for each market, giving you the flexibility to choose your appropriate risk-to-reward ratio.
Benefits of trading Bull Spreads
Bull Spreads are suitable for the retail trader looking for high leverage and hedging opportunities.
- Trade with strictly limited risk
- Low collateral required to trade
- Take highly leveraged positions
- Multiple daily trading opportunities
Bull Spread Contracts
When a contract expires, we obtain an expiration value based on the specified underlying market, using the following process:
Indices and Commodities:
- Take the last 25 trade prices in the underlying market
- Remove the highest 5 prices and the lowest 5 prices
- Take the arithmetic average of the remaining 15 prices and round to one decimal point past the point of precision of the underlying market (with the exception of Wall Street 30, which is rounded to the same point as the underlying market)
- Take the last 10 midpoint prices in the underlying market
- Remove the highest 3 prices and the lowest 3 prices
- Take the arithmetic average of the remaining 4 prices and round to one decimal point past the point of precision of the underlying market
The market prices we use to calculate the expiration values for Indices and Commodities contracts are obtained through a data feed from Reuters. If Reuters is unavailable, we may obtain market pricing data through Bloomberg or another data provider that we deem appropriate under the circumstances.
The market prices we use to calculate the expiration values for Forex contracts are obtained through a proprietary data feed (“NadexFX”) comprised of quotes from 12 well known banking institutions. If NadexFX is unavailable, we may obtain market pricing data through Bloomberg or another data provider that we deem appropriate under the circumstances.
For more specific details please see the individual contract in the Nadex Rules.
Bull Spreads are cash-settled contracts with a variable, linear payout that allow trading on the expected direction of the underlying market.
The settlement value is obtained based on the expiration value and the floor/ceiling levels of the individual contract.
- If the expiration value is at or below the floor level, the settlement value will be the floor level
- If the floor level < the expiration value < the ceiling level, the settlement value = the expiration value
- If the expiration value is at or above the ceiling level, the settlement value will be the ceiling level
We list a wide range of Bull Spread contracts, with timescales ranging from one day to as little as two hours. As a general rule, the difference between the floor and ceiling level (the range) is smaller for contracts with a shorter duration.
As an example, the Bull Spread contracts based on EUR/USD might have the following specifications:
- Daily (one expiration per day, floor/ceiling range = 600 pips)
- Floor: 1.3300, Ceiling: 1.3900
- 5 or 8 hour (three expirations per day, floor/ceiling range = 250 pips)
- Floor: 1.3600, Ceiling: 1.3850
- Floor: 1.3475, Ceiling: 1.3725
- Floor: 1.3350, Ceiling: 1.3600
- 2 hour (20 expirations per day, floor/ceiling range = 100 pips)
- Floor: 1.3550, Ceiling: 1.3650
- Floor: 1.3500, Ceiling: 1.3600
- Floor: 1.3450, Ceiling: 1.3550
This is just an example – the actual Bull Spread contracts for EUR/USD on Nadex may be substantially different from those above.
Relation to Underlying
For Bull Spreads with a wide Floor/Ceiling range, the underlying market will generally be trading within that range. In this scenario, the price of the Bull Spread is likely to be very close, or even identical, to the price of the underlying market.
In the case of Bull Spreads with a narrow floor/ceiling range, the underlying market might be trading near (or even outside) these levels. This results in contract prices that could differ significantly from the price of the underlying market.
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