The E-mini Russell 2000® stock index futures may not be the most well-known among day traders and swing traders, but it has a unique personality that many traders like. Just as investors have moved away from investing in single stocks and mutual funds in favor of index funds, short-term traders are increasingly choosing to day trade and swing trade stock indices like the Russell®, which reflects the performance of smaller businesses in the US.
Traditionally, traders have used stock index futures and more recently, ETFs as financial instruments for trading stock indices. Stock index futures trading can involve some significant challenges, however:
- Many brokers require $5,000 or more as a minimum opening deposit
- You can never be 100% sure of what your maximum possible loss could be
- If that loss exceeds the amount you have in your account, you could get a margin call and owe additional money to your broker
- Your risk management tools are limited to stop-loss orders and, if you’re sophisticated, option hedging strategies
Nadex binary options and option spreads offer a new way to day trade the Russell 2000® and other US and international stock indices. For many individual traders, it may be a better choice. You can open an account with as little as $250 and you can set your maximum possible loss before you enter each trade. Because our members never have losses exceeding their account balance, Nadex never issues margin calls.
What is a stock index like the Russell 2000® and why trade it?
While the well-known Dow® reflects the top 30 industrial firms in the US, the Russell 2000® index reflects the overall value of 2000 small-cap companies, firms with lower total capital. Instead of tracking the biggest fish in the pond, it tracks a larger school of smaller fish.
Because it contains 2000 small, domestically-focused firms, some believe the Russell 2000® is an important bellwether of the US economy, one that isn’t skewed by the performance of giant multinationals. Its price action is a little different from that of other US indices, sometimes lagging and sometimes leading them.
While some investors and traders enjoy picking stocks and spend hours analyzing the P&E numbers and annual reports of different companies to put together a portfolio of their favorites, not everyone has the time or patience to do so. Professional fund managers do this full-time and while many are successful, research shows that over time, managed funds do not perform as well as the overall index. The reason is simple. An individual stock can be affected by many variables, like a government contract, the resignation of a CEO, or the rise of a new competitor. Trading a stock index lets you take a position on the overall market.
Nadex is designed for day trading stock indices like the Russell 2000®
Nadex binary options and option spreads are designed for trading short-term moves in markets like the Russell 2000®, which can go through alternate phases of being volatile one day and quiet and range-bound another. With durations from 20 minutes to one week, these contracts let you trade without worrying about some of the downsides associated with futures trading:
- Minimum opening balance is just $250
- All binary options cost less than $100 each
- You set your maximum possible loss and profit before each trade, so you never lose more than you planned for
- As a result, you don’t need a stop-loss and you can never get a margin call
How to hedge your portfolio using Nadex binary options and spreads on the Russell 2000®
Long-term buy-and-hold investors inevitably face downturns in their portfolios lasting hours, days, or months. Hedging is a way to cushion yourself against those losses. Banks, mutual funds, and large investors have used stock index futures for many years to hedge against downturns in their stock portfolios. In fact, your bank, insurer, or 401(k) provider probably uses index futures to protect against volatility that could add risk to your account.
Hedging the Russell 2000® simply means you simultaneously trade another instrument that will gain value if the stock market drops. Some traders short-sell index futures or buy put options to hedge. The goal is to have the gains in your short-term trade hedge offset some of the loss in your stock portfolio.
Nadex traders can use binary options and options spreads to do the same thing. If the market is having a down day or you anticipate a downturn because of some negative news, you can sell binary options or spreads on the Russell 2000® or other stock indices like the S&P 500®, Dow®, and Nasdaq®. You can use a variety of strategies, selling out-of-the-money binaries that may expire in the money or selling a spread that moves with the trend.
Day Trading the Russell 2000® on Nadex is Different
Nadex binary options and option spreads offer an affordable way to try a variety of Russell 2000® trading strategies and add them to your portfolio. You choose your maximum profit and loss up front, before you place the trade. You don’t have to worry about unexpected losses or margin calls, as you may find in other kinds of stock or futures trading. And you get risk management without needing to set a stop-loss.