The Dow Jones Industrial Average® stock index is the most well-known measure of the US stock market and familiar to both day traders as well as investors. While equity investors have long followed the Dow®, in recent years they have also begun to invest in it directly using index funds. While stock index futures have long been used by institutions to hedge their portfolios, in recent years, individual day traders and swing traders are also trading stock indices like the Dow®.
Traditionally, traders have used stock index futures and more recently, ETFs as financial instruments for trading stock indices. As with any kind of futures trading, stock index futures trading traditionally involves
- relatively high account balance minimums
- the possibility of unexpected losses
- margin calls
- the need to use stop-loss orders to manage risk
Nadex binary options and option spreads offer a new, possibly better way for individual traders to day trade the Dow® and other US and international stock indices.
What is a stock index like the Dow® and why trade it?
The Dow Jones® Industrial Average reflects the overall value of 30 of the largest US manufacturing corporations, using a weighted average. In recent years, the definition of “industrial” includes makers of software and intellectual property like Disney and Apple as well as older industrial firms like IBM and Boeing.
Interest in trading stock indices has grown for several reasons, including the fact that any individual stock’s value can run into trouble because of, say, a lost government contract, mismanagement, or competition, even while the rest of the sector does well. So if the stock does well, so do you, but you might also pick the one troubled stock in an overall thriving sector. If you don’t want to engage in stock-picking, trading the index lets you take a position on the sector or overall market.
Nadex is designed for day trading stock indices like the Dow®
Nadex binary options and option spreads are designed for trading short-term moves in markets like the Dow®, 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 Dow®
If you are a buy-and-hold investor you are going to experience downturns lasting hours, days, or months. Hedging is a way to cushion yourself against those losses. Banks, mutual funds, and large investors have traditionally used stock index futures to hedge against downturns in their stock portfolios. In fact, your insurance company, retirement fund, or bank probably hedge against price fluctuations using Dow® futures or options contracts. In a sense, you’re already participating indirectly in index futures trading.
Hedging the Dow® simply means you simultaneously trade another instrument that will gain value if the Dow drops. That way, the loss in your stock portfolio is offset somewhat by gains in your other short-term trade. Some traders short-sell index futures or buy put options to hedge.
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 Dow® or other stock indices like the S&P 500®, Russell 2000®, 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 Dow® on Nadex is Different
Nadex binary options and option spreads offer an affordable way to try a variety of Dow® 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.