NADEX.com – Retail Derivatives
I never thought derivatives would get their day in the spotlight with retail investors. Already offered to investors are futures, options, and in other countries, contracts for difference. This new and interesting exchange could be the start of something big for retail investors.
What is NADEX
Nadex stands for the North American Derivatives Exchange. The exchange specializes in binary contracts which are essentially trades based on the chance a certain event will happen. The exchange is very simple for now, offering only a few different derivatives on a few different investments but could soon grow as retail investors look for more speculative investments.
What are Binary Contracts
To put it simply a binary contract is a bet made between two different people. Using the Dow Jones Industrial Average as an example, the bet we’ll use is that the Dow will close above 11,000 by January 1, 2011. You think the market has a great shot of reaching that level by 2011 so you buy the contract for a predetermined price, let’s say $40. The opposing party doesn’t think it will happen so they sell the contract for $60. If the price passes 11,000 by Jan 2011 you receive a payout of $100, for a total profit of $60. If it doesn’t, the counter-party gets $100 for a total profit of $40. In this example there is no spread, so it would be more likely that you would pay $43 and the opposing party might pay $65 to make the trade. The $8 would be the broker’s profit.
There’s Only One Thing Holding Nadex Back
I think the time has come that investors would be interested in derivatives trading. However, taking a look at the Nadex.com website you’ll find that the spreads on most contracts is huge, often 5-8%. If the exchange is able to close the gap between these spreads and add some big players to generate liquidity, I would most certainly begin trading on the exchange and I’m sure many others would as well. Also, the exchange only features a limited number of derivatives and does not allow its traders to write their own contracts, which could huge room for growth. Time will tell, however.
Hi, thanks for the article. As an active trader there I may say I like their service in many respects as it provides good hedge to my FX options positions. I’d just add it would be nice if they also offer one-touch\no-touch options and perhaps even something to bridge the gap between weeks (the longest binary options you can get is the weekly ones) such as bi-weekly or monthly binary options.