The North American Derivatives Exchange
NADEX is the North American Derivatives Exchange. It is an offshoot of IG Markets, an international provider of CFD and other derivative instruments. Currently IG Markets operates in England, Europe and Australia providing traders a platform for trading. NADEX is the North American branch of this network and currently the only CFTC, SEC and OCC registered, licensed and regulated broker or exchange operating in the U.S. and North America. Regulation is important for binary options because it provides a base from which the industry can grow while building trust among traders and service providers. CFTC and SEC regulation is not the only kind of binary option regulation, just the only kind recognized acceptable in the U.S. at this time.
Binary Options Regulation
Other forms of binary options regulation include CySEC, FSA, FSC, BaFIN and Isle of Man GSC among other local jurisdictions. CySEC has been leading the way in this regard. It is the Cyprus Securities and Exchange Commission and was the first to categorize binary options as a financial instrument. Because of CySEC’s work and member status in the EU CySEC regulated binary options brokers and service providers are able to reach traders throughout the EU and friendly nations through the Economic Passport.
Banc De Binary is one of the leading binary options brokers in this area although they still suck as a broker. BDB was the first to get CySEC regulation and subsequently FSA and BaFIN regulation. The FSA is the Financial Services Authority of England, BaFIN is the financial regulatory body of Germany. Other countries are also getting into the fray of binary options regulation. The FSC of the British Virgin Islands is one. This small island nation is one of the worlds banking/tax havens and a hot spot of the binary options industry. At this time there is no binary options broker, exchange or service legally operating in the U.S. besides NADEX and the limited binary offerings of the CBOE and AMEX.
- Binary Options Regulation – Futures, options and derivatives trading is governed in the U.S. by the CFTC and the Commodity Exchange Act. Through its mandate to protect U.S. citizens from fraud and unscrupulous trading practices the CFTC has said that no unregulated options or other financial derivatives may be marketed or sold to U.S. citizens. This is why BDB and others have been shutting their doors to the U.S. The SEC’s stance is a little less clear and seems to provide a loophole a few brokers have seized upon. These loopholes have lead some brokers to offer options on some assets but not on others, usually commodities.
It seems clear to me that as regulation progresses in other parts of the world it will systematically shut down access to U.S. traders. Regulation could change at any time and those loopholes could close at any time. CySEC’s recognition of binaries as financial instruments is great for the European and international markets but will eventually keep them out of the U.S. market. There are other sources of “off shore” binary options regulation such as ASIC, FSA and Isle Of Man GSC.
What Can You Trade At NADEX
There are some differences between NADEX and European style options that lie mostly in the types of options traded. With CySEC/European style binary options you can trade high/low, over/under, one touch, 60 second, range and 0-100 style binary options on all the major world indexes, currency pairs and commodities. At NADEX you can still trade all the same underlying assets but they are less types of options to choose from. There are only two kinds of options at NADEX, binary options and bull spreads.
Binary options are a fixed return, all or nothing trading vehicle with only two outcomes. If you win the option is worth $100, if you lose it is worth nothing. The price you pay for each contract will be somewhere between $0 and $100 depending on market conditions. If you pay $45 for an option and it profits you receive $100 for a net gain of $55-fees. Bull spreads trade like a covered call or options spread. They are binary outside the range but pay spot price within the range.
- NADEX has binary options and bull spreads on all the major stock indexes, 8 major currency pairs, commodities and even some economic events. Each underlying asset is traded through a derivative binary options with an identical value. Some, but not all, have a different name. The S&P 500 is called the U.S. 500 and the EUR/JPY is stilled called the EUR/JPY.
- Binary Options- NADEX binary options are all or nothing trading vehicles with expirations ranging from this morning to this afternoon, the close of todays session or the close of this weeks session. They are worth $0 or $100 at expiration. You choose from a list of possible strikes and expirations, pay market price and profit the difference. Market price will range between $0 and $100, comes with a bid/ask spread and fluctuates with the movement of the underlying asset.
- Bull spreads- Bull spreads are similar to binary options but have some distinct differences. In essence bull spreads trade like a future mixed with an option spread. Outside the range of the spread the bull spread is binary, just like an options spread. If it closes higher than the range you get the maximum return, if it closes lower than the range you get the maximum loss. Within the range the bull spread trades like a future and is worth $1 per point. If the bull spread closes within the range but higher than your buy-in point you will receive the difference between your paying price and the spot price at expiration.
Trader Resources At NADEX
There is a complete set of trader tools at NADEX. The set includes the basic information on trading binary options and bull spreads and other more advanced tools. The ongoing education series consists of daily webinars on subjects ranging from strategy to charting and psychology. The platform is easy to use but takes a little getting used to. Once you have taken the tour and gotten familiar with it you will have no problem. There are charts available but I still prefer to use my charts through OptionsXpress.
What Are The Differences Between NADEX and CySEC Binary Options
Let’s compare NADEX and the general off-shore/European Style/CySEC binary options industry. European style CySEC regulated binary options brokers are not the same as NADEX for a variety of reasons. First, CySEC regulated binary options brokers are more like banks offering high yield investments. NADEX is more like the NYSE or the AMEX. The high yield investments, binary options, are sold directly from the bank(binary options broker) to the client (you). The binary broker makes money by keeping 70-100% of losing trades and a smaller percent of winning trades. Brokers try to keep their books even by matching buyers of puts and calls. When this is not possible they have even resorted to manipulating closing prices in order to keep themselves in the green. These aspects of the binary options industry is one of the reasons it has received so much criticism over the past few years and why there is so much risk of fraud and shady dealings from offshore brokers. This is also why CySEC came into play, to prevent fraud and provide a framework for fair dealing.
Second, NADEX is an options exchange. This means it is a market place, much like your local farmers market.A binary options market place is where binary options traders can come together to buy and sell options. The exchange charges a fee per trade in order to make its money and not a percentage. The fees are inconsequential when compared to trading CySEC style binary options. NADEX charges $0.90 per contract with a maximum fee of $9 per trade. $100 at NADEX could buy you two contracts with a cost of $1.80. With CySEC if you trade $100 the broker may get $70-$100 of that money if you lose, depending on rebate structure. They may get as much as $20-$30 from the opposite side of the trade if you win.
This difference is one reason why CySEC style binary options are not allowed in the U.S. I know you are thinking to yourself right now if that is the case why are so many brokers still operating with U.S. clients. The answer to this is they are doing so at the risk of themselves and their clients. The CFTC has already shut down several brokers. The leading CySEC style binary options brokers are now shutting their doors to U.S. traders one-by-one as they receive regulation to protect themselves so be careful if you (American Trader) choose to use one.
The third major difference between NADEX and CySEC/European binary options is tradability. CySEC binary options can not be sold (usually) before expiration and are only worth $0 or your predetermined return. NADEX binary options are highly tradable and can be bought and sold at any time prior to expiration. Since the price of NADEX options changes over time your profit or loss will be determined by the difference in opening price and closing price. Another great thing about NADEX binary options is that they can be sold short. That’s right, sold short. Unlike CySEC options which are only debit positions (buy a call if bullish, buy a put if bearish) NADEX options are either debit or credit. You buy the position if you think the market is moving up and will close above, you sell the position if you think the market is not moving up and will not close above. This reason alone makes NADEX more attractive to me simply because it opens up so many different types of strategies that can not be used with CySEC options.
- The Greeks And Binary Options- The options Greeks Delta, Theta, Vega and Gamma have no bearing on binary options. They do play an underlying role on market value but are not present during trading. You do not have to worry about how far, how fast an asset moves while keeping one eye on volatility and another on interest rates. Binary options close in the money if they are above the strike price and out of the money if they are below it. They only have two values and you receive all or nothing at expiration.
Are CySEC Binary Options Brokers Safe
CySEC style binary options and brokers are safe. Trading binary options is a viable method of speculating world markets and it can be done profitably. However, like all financial vehicles, especially highly speculative ones like binary options, they come with risk and should be approached with caution. Be sure to check into any broker before depositing money and make double sure of their withdrawal methods and requirements. I have three CySEC/European style binary options brokers on my short list of approved brokers. These are:
Binary Options Are Risky
Trading of any kind is risky. I highly recommend that you spend as much time as possible learning about the financial markets, fundamental and technical analysis before you begin any trading. You should also consult a professional and make sure you have the resources to risk money on trading binary options. Binary options are not a get rich quick scheme, it is possible to lose your entire investment or account in one trade.