Sell the EUR/USD using Spreads

1. Choose your market and expiration

In this example, we expect the spot EUR/USD price to sell off “X” number of pips by the close of the day’s trading session. We plan to sell the Nadex EUR/USD spread with about 8 hours left until expiration. Our next step is to choose the price range we want our spread to cover.

The chart below shows the Indicative Index price of the Nadex EUR/USD contract, which is based on the spot price from a proprietary data feed (“NadexFX”) comprised of quotes from 12 well known banking institutions. We continuously calculate the indicative index price using the best bid/offer quote of the last 10 midpoint prices as the sample set. This reduces anomalies and creates a reliable price for trading. We use the same calculation for the expiration settlement price.

 

Your spread trade already has the built-in protection of knowing your maximum possible loss up front. Where a binary option’s expiration value will be either zero or $100, a spread’s value can vary from the lowest value of the range up to the highest, with incremental values in between.  

You can also choose to exit the spread trade any time prior to expiration to take an early profit or cut your losses. If however the underlying market goes below or above the spread range, the price is limited to the low and high strike prices.

2. Selling the spread near the ceiling, middle or the floor?

 

 

The 3 colored boxes above represent each spread contract’s floor and ceiling. The lowest, for example, is the EUR/USD 1.0760-1.1010 spread.

As you can see the underlying market price (EUR/USD) is around 1.1010 and we’re looking for the spot EUR/USD to sell off to the 1.0850 area. When you sell a spread, you have a choice of spread ranges. Each spread range has tradeoffs and different traders will prefer different spreads based on their risk profile, their trade bias and the ROI that they are looking to achieve. Let’s look at the choices.

3. Placing your Sell order

For the sake of this example, we sold three different spread ranges, all at 7:06 am ET. Below are the order tickets showing 7 hours and 53 minutes remaining. All three are based on the same underlying market, so the underlying market price is identical. However, each one has a different range. That makes the spread prices different, since each has a different maximum possible loss and profit.

 

Selling 1- EUR/USD 1.1010-1.1260 spread @ 1.1025

  • The spread value of the range is $250, the difference between the 2 strikes at $1/pip.
  • Short at 1.1025 trade price, the risk exposure is from 1.1025  up to 1.1260strike = $235 cost
  • Max profit potential, is from 1.1025 trade price down to 1.1010 lower strike = $15
  • The Nadex spread price is near the spread floor with the underlying indicative already 13.8 pips   lower (1.1025- 1.10112) which is similar to ITM put
  • The seller pays for this immediate advantage resulting in a higher initial cost and lower ROI of 6.4%.
  • With the spread pricing skewed toward the lower strike, the Nadex pricing will be less sensitive to the underlying price movement until the underlying price trades toward the middle of the spread range.

              

              

Selling 1- EUR/USD 1.0885-1.1135 spread @ 1.1011

  • The spread value of the range is $250, the difference between the 2 strikes at $1/pip.
  • Short at 1.1011 trade price, the risk exposure is from 1.1011  up to 1.1135 strike = $124 cost
  • Max profit potential, is from 1.1011 trade price down to the 1.0885 lower strike = $126
  • The Nadex spread price is more in the middle of the spread range with the underlying indicative having only 1.4 pips differential which is similar to ATM put
  • The spread seller pays less compared to the previous spread example but note how the costs for both the spread seller and the spread buyer are more equally distributed.  There is no immediate advantage implied from the price differentials of the spread price and underlying price. Here the ROI is a little better at 102% but a lower initial cost.
  • With the spread pricing skewed more in the middle of the spread range, the Nadex pricing will be more correlated to the underlying price movement.

 

 

Selling 1- EUR/USD 1.0760-1.1010 spread @1.0993

  • The spread value of the range is $250, the difference between the 2 strikes at $1/pip.
  • Short at 1.0993 trade price, the risk exposure is from 1.0993  up to 1.1010strike = $17 cost
  • Max profit potential, is from 1.0993 trade price down to 1.0760 strike = $233
  • The Nadex spread price is near the spread ceiling with the underlying indicative already 20.1 pips (1.10131-1.0993) higher which is similar to the OTM put
  • The seller pays less for this immediate disadvantage resulting in a lower initial cost and a much higher ROI of 1371%.
  • With the spread pricing skewed toward the higher strike, the Nadex pricing will be less sensitive to the underlying price movement until the underlying price trades lower toward the middle of the spread range.

 

On Nadex trading fees and expiration fees are 90 cents per contract for the first 10 contracts in an order. Larger orders will still only be charged $9. So in this example, the total cost to enter the trade was $42 + 90 cents or $42.90. When you exit the trade, either early or at expiration, you’ll get a second fee of 90 cents (called a trading fee or expiration fee).

4. Manage your trade until exit or expiration

Once your trade is executed, the full cost for all 3 spreads is taken from your account immediately. That is the maximum risk of the trade position.

Below is the Open Positions Window showing the current market price at which the positions can be closed immediately. Since you sold the spreads and therefore need to buy them back to close the trade, the current market shows the best offer price, which is what you’d pay. There are 7 hours 48 minutes until these positions expire.

 

Unfortunately, as you can see below, the EUR/USD did not sell off as expected but was pushed higher. All our spread positions have limited risk, but each one has a different maximum loss, which we knew when we entered the trades.

The middle spread, EUR/USD 1.0885 – 1.1135, is showing an unrealized loss of $40. The spread listed on top, EUR/USD 1.0760-1.110, shows nothing because the market is so far above the range no one is offering to buy it. It is similar to an OTM put; the initial cost was minimal.

Because its range is lower, the middle spread’s pricing has a higher correlation to the price movement of the underlying market which results in a bigger loss. The cheaper spread didn’t have much to lose.

 

With four hours till expiration, there’s a chance the EUR/USD could continue pushing higher, increasing our losses. The initial cost of the EUR/USD 1.0885 – 1.1135 spread was $124. The position is already down $40, or 32%. For this example, we decided to close the trade. Other traders might choose to wait and see or even hold it until expiration. This spread was most closely correlated to the movement of the underlying market. That meant it was also the most vulnerable to market movement upwards. The other spread positions being lower and higher, had the price closer to their floor or ceiling and less likely to move very much.

This is why choosing a range is so important to limiting risk. You want higher correlation where your trade will profit from movement and lower correlation at the prices where your trade will be at risk.

The trade loss on the closed position, the EUR/USD 1.0885 – 1.1135 spread, was $39, meaning you got back $85 ($124-39), which is also the difference between the ceiling price of 1.1135 and the trade price of 1.1050, at which you closed.

After we closed the middle spread, the EUR/USD did in fact trade lower, which improved our remaining two spread positions. As you can see the underlying indicative EUR/USD price is 1.10100 exactly. From this point, if the EUR/USD continues trading lower, the value of the EUR/USD 1.1010 – 1.1260 spread won’t increase further because the market is already at the floor. However, the other spread, the EUR/USD 1.0760 – 1.1010, has the possibility to recoup some of its initial cost. If the spot price drops another 17 pips, the trade is will break even.

We decide to hold the 2 spread trades until expiration with the expiration results below using the Nadex expiration value of 1.10025.
.

EUR/USD 1.0760-1.1010 Spread: - $9.50 Loss

($7.50 Proceeds received at settlement and $17 Initial cost)

EUR/USD 1.1010-1.1260 Spread: + $15 Gain

($250 Proceeds received at settlement and $235 Initial cost)

 

Once your spreads expire and are settled, you'll receive an email from the exchange that says:

 

 

Your position in the EUR/USD 1.0760-1.1010 (3PM) contract has settled.
Settlement Details:
Contract: EUR/USD 1.0760-1.1010 (3PM)
Quantity: -1
Expiration Value: 1.10025
Payout Amount: $7.50

Your position in the EUR/USD 1.1010-1.1260 (3PM) contract has settled.
Settlement Details:
Contract: EUR/USD 1.1010-1.1260 (3PM)
Quantity: -1
Expiration Value: 1.10025
Payout Amount: $250