Spread contracts have a variable payout that lets you take a short-term position on the direction of a market. These contracts are very easy to understand as they allow you to trade on where a price will go thereby limiting your exposure to volatility in the market.
These spread contrast are based on an underlying market and are settled based on that. The underlying markets are generally a Futures market such as grain or precious metals.
As an example, if you buy a Spread contract you are essentially buying a instrument that you are taking apposition ion will be worth more than the buying price at expiry. And when you sell a Spread Contract you are doing the inverse: you have speculated that the instrument that you are selling will be lower at the time of settlement.
Floor and Ceiling
All Spreads contracts have top and bottoms called Floors and Ceiling associated with them. These represent the minimum and maximum levels at which the Nadex contract can be settled, no matter how far past either level the underlying market may have moved. The Floor and Ceiling values for each individual contract remain constant throughout the life of that contract. This is a tremendous advantage because at the outset the maximum gain and /or loss is already defined.
Contract Size
All Spread contracts are defined such that a 1-point (or 1-tick) movement means a $1 profit or loss per contract. So if you bought 3 contracts and sold them for a 25-point gain, your profit would be 3 x 25 x$1=$75. Likewise, if you bought 10 contracts which were settled at a 19-point loss, you would lose 10 x 19 x $1 = $190. This allows you to know that a one point movement is always s worth $1 per each contract you own
The definition of a ‘point’ can vary between different underlying markets. As an example, Wall Street 30 is quoted in full numbers, i.e. 11467, while Crude Oil is priced in dollars and cents, i.e. $75.09.
Comparison with underlying market
For what is known as a Master Spread contract a large range between the levels of Floor and Ceiling will generally be trading between these values. Therefore the price of the Master Spread contract is likely to be easily compared with the underlying market.
Narrow spreads on the other hand have a converse relationship, that is the levels of the floor and Ceiling may be narrow meaning that the underlying market might be trading near (or outside) of those levels. The net effect of this is that prices have a greater degree of optionality and are much tougher to draw comparison to the underlying market.
For more information about Spread Contracts and Forex Trading see IG Markets.
These products are not suitable for everyone, so please ensure that you fully understand the risks involved. These products are volatile instruments that involve a high risk of losing all of your investment. Past performance is not always indicative of future results