Floor-ceiling range (spread range, floor and ceiling levels)

What do floor and ceiling mean in spread trading and knock-outs trading?

The floor and ceiling of a Nadex spread or knock-out define the maximum and minimum risk exposure for both buyer and seller. Between the floor and ceiling, the spread or knock-out's value will move along with the price movement in the underlying market.

However, if the indicative price goes above the ceiling or below the floor of a call spread contract, the price stops moving. If the indicative price goes above the ceiling or below the floor with a knock-out contract, you will be knocked out of the trade, taking your maximum possible profit or loss. This is how it works:

Your risk and reward are capped

Knock-out contracts: If you buy a knock-out contract and the indicative price hits the floor of the range, you are knocked out of the trade, taking your maximum possible loss. This gives you protection similar to that of a stop-loss order.

If you buy a knock-out contract and the indicative hits the ceiling of the range, you are knocked out of the trade, taking your maximum possible profit. This gives you a natural profit target.

Call spread contracts: If you buy a call spread contract and the indicative price moves below the floor of the range, the spread stops losing value. This gives you protection against losses similar to that of a stop-loss order. However, you are not stopped out of the trade.

If you buy a call spread contract and the market moves above the ceiling, your spread stops increasing in value. This provides you a natural profit target, since the spread’s value is at its maximum. Again, though, you are not stopped out of the trade.

Between the floor and ceiling of both contract types, the spread price moves with the price movement of the underlying market. In the middle of the range, price movement is most closely correlated to the price movement of the underlying market.

This allows you to trade part of a trend with both protection against risk and a built-in profit target.