What Do Floor and Ceiling Mean in Spread Trading?

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

However, if the underlying market price goes above the ceiling or below the floor, the price of the spread stops moving. Here's an example of a spread trade:

 

 
 

 

Your risk and reward are capped

If the underlying market 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 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.

Between the floor and ceiling, 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.

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

Why longer duration spreads have wider ranges

The range of a Nadex spread can vary based on how far a particular underlying market’s price can move in a given time period, and how long it is until the spread’s expiration. With longer durations, the spread range will be wider between floor and ceiling. The shorter durations have narrower ranges.

The reason for this is straightforward: the more time a market has to move around, the further it may move. So Nadex gives a wider range to a spread that will have more time to move around.

For example the Nadex US500 spread, based on the CME E-mini S&P Futures, typically has ranges like these:

Spread contract

Duration

Range

Daily US500 1990.0- 2030.0

22 hours 15 minutes

40.0 points

Daily US500 2000.0 -2030.0

8 hours 15 minutes

30.0 points

2-hour US500 2020.0 - 2030.0

2 hours

10.0 points

See all glossary trading terms

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z