- How does Nadex calculate the expiration value for futures, forex, and economic event contracts?
- How does the expiration value impact the payout of binary options?
- How does the expiration value impact the net gain/loss on spread contracts?
Nadex binary options and spreads are types of options. They have an expiration date and time, when trading ceases and we calculate the expiration value. That’s how we determine who gets the payout and, in the case of spreads, how much.
Nadex employs several safeguards to ensure that every trade has a fair and accurate outcome.
- Nadex offers only the most liquid markets, those with many participants.
- We have position limits to help ensure liquidity and a fair, level playing field for individual traders.
- We base the settlement calculation on an average of the last several prices, not the last price. This also blocks any attempts to manipulate the outcome.
Expiration Value Calculations:
The settlement calculations for futures and currencies are slightly different:
Futures Expiration Value Calculation (See “Underlying Markets” for a review of futures markets).
For stock index and commodity futures, Nadex uses the following settlement calculation:
- Take the last 25 trade prices in the underlying market
- Remove the highest and lowest five prices, leaving the middle 15
- Average the remaining 15 prices and round to one decimal point past the precision of the underlying market. (For the Wall Street 30 we round to the same precision as the underlying.)
Let’s take a look at an example using Crude Oil. On the left are the last 25 traded prices in numerical order:
Cross out the highest and lowest five prices. The average of the middle 15 (in bold) is 65.001.
If you had bought a Crude Oil > 65.00 contract, it would be in the money and you would get the $100 payout at expiration. That 0.001 difference is enough because of the all-or-nothing design of binary options.
That’s why we calculate the expiration value to three decimal places, even though the price of the underlying market is given to only two places. The average price is a more accurate reflection of the state of the market. The binary option is in fact above the strike price of 65.00 and in the money. The buyer gets the payout.
Expiration value calculation for currencies:
Unlike futures, which are traded on a central exchange, currencies are traded on a global network. Therefore the settlement calculation is different, but the goal is the same: to get an accurate picture of the market and determine fairly which trades should profit. Nadex uses a proprietary forex data feed, based on a compilation of data from twelve major global banks, to ensure accuracy.
Nadex calculates the expiration values for spot FX with different calculations under normal conditions and for highly active markets.
- When 10 or more midpoint prices between the best bid and offer (10 pips wide or less) are collected from the underlying market in the final 10 seconds before expiration of the contract:
- Nadex takes all midpoints collected (10 pips wide or less) and removes the highest and lowest 30% of prices. If 30% of the data set is a non-integer, the nearest rounded-down integer is used. We then average the remaining prices and round to one decimal point past the precision of the underlying market.
- If it takes more than 10 seconds to collect at least ten midpoint prices between the best bid and offer (10 pips wide or less) leading up to expiration of the contract:
- Nadex takes the last 10 midpoints (10 pips wide or less) before expiration and removes the highest and lowest 3 prices. We then calculate the average of the remaining 4 prices and round to one decimal point past the precision of the underlying market.
Nadex obtains its underlying market data from a proprietary forex data feed based on data from ten major banks.
Nadex Economic Event Contracts
In addition to futures and currencies, Nadex offers binary options on economic events. The settlement process for those markets is straightforward:
The expiration value is the figure released by the designated reporting body. For example, the weekly jobless claims number is reported by the US Bureau of Labor Statistics.
Once the expiration value calculation is run, it produces a settlement value which is used to determine the payout for both binary options and spread contracts.
Binary Options are cash-settled contracts that settle with an all-or-nothing payout if left to expiration.
- If the condition stated in the contract is achieved, the settlement value is 100
- If the condition is not achieved, the settlement value is 0
So if the above Crude Oil > 65.00 binary settled at 65.001, it would be considered in-the-money. The buyer would receive $100 at expiration and the seller would receive zero.
If the expiration value had been 65.000 or below, the contract would be considered out-of-the money and settle at $0. The seller would receive the full $100.00 payout at expiration and the buyer would receive nothing.
Nadex spreads are cash-settled contracts with a variable payout. Unlike binary options, which have an all-or-nothing payout, spreads have a payout which varies based on the price of the underlying market, but has an upper and lower limit. This gives you built-in risk control :
- If the expiration value is at or below the floor level of the contract, the settlement value will be the floor level
- If the expiration value is at or above the ceiling level, the settlement value will be the ceiling level.
- If the expiration value is in the range between the floor and ceiling, the settlement value will be equal to the expiration value
For example, if we have a spread on the EUR/USD with a floor of 1.1000 and a ceiling of 1.1250:
If the EUR/USD exchange rate is at 1.0950, which is below the floor of 1.1000, the settlement value for the spread will be the floor of 1.1000. The value can never go below the floor.
If the EUR/USD is at 1.1275, which is above the ceiling of the contract of 1.1250, the settlement value for the spread will be the ceiling of 1.1250. The ceiling is the maximum possible value, just as the floor is the minimum.
If the EUR/USD settles between the floor of 1.1000 and the ceiling of 1.11250, then the value of the spread is the same as the price of the underlying. The profit or loss at expiration is the difference between where you bought or sold and the expiration value. If you bought at 1.1050 and the settlement value was 1.1125, your profit would be 1.1125 - 1.1050, or 75 points.
If you had sold at 1.1200 and the settlement value was 1.1150, your profit would be 1.1150 -1.1200, or 50 points.
- How the expiration value is calculated for futures, forex, and economic event contracts
- How the expiration value impacts the payout of binary options
- How the expiration value impacts the net gain/loss on spread contracts
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