What are Call Spreads and How Do They Work?


What are call spreads?


Man trading Nadex Call Spreads

Markets are fluid and agile. Your trading strategy should be too.

Call spreads let you buy the time and flexibility to be right, with protection in case you are wrong.

From the moment of inspiration when a trade idea strikes, to placing the trade and then exiting on your terms – we know you love the thrill when your trading strategy works.

That heart-pounding, fist-pumping feeling is part of why you trade.

We also know markets can be unpredictable. They are volatile, fluid, always in motion. Whether the market moves up, or down, or stays flat, we think you should have many opportunities to take a position.

It’s why we offer Nadex Call Spreads.

Call spreads offer tick-for-tick correlation with the market within a predefined range. They have a floor and a ceiling which create the range. If you buy a call spread and the underlying market moves below the floor, you simply stop accruing losses but you stay in the trade.

Let’s discuss why that’s important. Sometimes when you trade the market can turn and move against you. It doesn’t always mean you were wrong. The market might eventually move where you thought it was going, but maybe your timing was off or you didn’t know the exact path the market would take.

You use stops or exit early for protection. But, you also know even if a stop is triggered that doesn’t necessarily mean a market won’t come back around and end up where you thought it would.

That can be tough to watch when you are already out of the trade.

Few things can cause more desk-pounding frustration for a trader as when their idea or opinion was right...but they just didn’t have the time and space to be right.

Call spreads offer a unique approach. You have exposure to the excitement of correlation with the underlying markets and the confidence that comes with a built-in plan for risk management.

You can manage your risk without cutting short your exposure to a market that’s moving. Trade dynamic markets with confidence knowing you have the time for the market to turn in your favor.



Why trade call spreads?


Nadex Call Spreads are a new approach to trading that buys you more time to be right, with the benefit of having protection against being wrong.

No matter how long you've been trading, chances are timing has been a difficult skill to master.

You've tried to call market tops. You've worked to pick bottoms.

There are times you might have even been successful. But you also know it’s hard. Timing can be a challenge and there is no perfect way to time or trade every market.

Now you can ride out drawdowns while you wait for the trade to potentially turn back in your favor. Stay in the position until you decide you want to exit.

It’s an empowering way to trade.

With call spreads, we built a way to trade that offers:

  • Tick-by-tick correlation with the underlying market within a pre-defined range.
  • Protection without stops, or the risk of being stopped out.
  • No slippage like you have with stops in other markets.
  • Expanded trading opportunities by trading a bullish or bearish view with ease.
  • Being able to apply the same approach, with the same benefits, to a wide range of dynamic global markets.
  • A built-in exit strategy offering natural profit targets for each trade.

More fist pumping. Less desk pounding.

Explore the benefits of trading call spreads in all the active markets you love.



How do call spreads work?


Man trading Nadex Call Spreads

Call spreads offer you more time and space for your trade to be right.

As a short-term trader, is the benefit of more time to be right helpful, while still having the protection of a stop loss?

You bet it is.

Let’s summarize a few key points to be aware of when you are ready to place your first call spread trade:

  • Entry Price - The price you pay to buy or sell the spread.
  • Floor Price - The lowest your spread can go. If the market drops further, your spread value stays the same. The floor represents your maximum risk if you're a buyer (and max reward if you sold).
  • Ceiling Price - The highest your spread can go. If you bought the spread, the ceiling represents your maximum profit. If you sold it, the floor is your maximum risk.
  • Tick-for-tick correlation – call spreads closely track the underlying market within the range of the spread, but stop moving above the ceiling or below the floor.

Let’s walk through those details together.

The first thing to know is that your maximum potential loss and profit are known upfront, at the start of the trade.

If you buy, the ceiling offers a built-in profit target. The floor of the spread acts as a loss limit.

With Nadex Call Spreads, we provide dynamic market exposure but also offer you boundaries. Your trading range will always be contained within a defined floor and ceiling.

The next thing to know is that inside of the range, the price moves in close correlation with the underlying market, but stops moving at the limits. Even if it goes past either limit, you stay in the trade until you decide to exit.

When the underlying market moves up or down, the spread price follows it closely until it reaches the floor or ceiling.

If the underlying market price moves below the floor price, the call spread’s value will drop to the floor and no further.

And the call spread’s value can only go as high as the ceiling. If the market rises above the ceiling and stays there until expiration, you get the maximum profit if you bought.

You can hold the call spread until expiration or exit the trade earlier. Your profit or loss is simply the difference between the price at exit and the price at entry.

The short-term nature of the call spread contract means that you can trade quick movements, get out, plan your next setup, all within minutes or hours.

Make short-term trades with all spreads in all the dynamic, global markets you love, with the time to be right, downside protection, and a built-in plan to manage risk.



What to read next: