Spreads Can Be Less Risk Than Binaries For News Trades

Various reports are due out for Canada on pricing and retail sales Friday at 8:30 a.m. ET. News indicating what the economy is doing tends to impact the market, and when it's a scheduled event we can predict when that movement is going to happen. The only thing left is making sure there is consistency in the market reaction and then a strategy can be chosen for a high probability trade.

Based on the USD/CAD market reaction to numerous past releases of this news, it was found the average move tends to be around 30 pips and then the market calms and pulls back. Now, it is unknown which direction the market will move, therefore a neutral strategy is necessary. Utilizing Nadex spreads with capped risk to setup an Iron Condor with one spread above and another below the market is a neutral strategy. It’s also one that is meant for a move when the market pulls back to where it started, or close to it. The market could also not move at all or stay in a range and this strategy would profit.

A Spread Isn’t All Or Nothing Like The Binary

The spread is unlike a binary option because it is not all or nothing at settlement. The profit or loss is determined only by how much the Nadex indicative price moved. The indicative price is based on the underlying market. Spreads can be much easier to trade and have less risk. The word “spread” is derived from the range of the market that is being traded. It has a floor market price and a ceiling market price, which marks the bottom and top of the spread’s trading range of that market. It can be traded long or short and the risk is capped because there is no profit or loss past the floor or ceiling.

The trick of the Iron Condor is to buy the bottom spread and to sell the top spread in expectation the market will settle right between them. The top spread’s floor should be where the market is trading at the time and should meet the ceiling of the bottom bought spread. For this trade, with an average 30-pip market reaction move, the profit potential for each spread should be around $15 for a combined profit potential of $30 for the trade.

Using the spread scanner and having the profit potential information, one can easily identify the right spreads for the Iron Condor setup. The trade can be entered at 8:00 a.m. ET for 10:00 a.m. ET expiration. Set the filters on the scanner for USD/CAD and expiration time for two hours to bring up the 10:00 AM ET USD/CAD expiring spreads. Then, look down the risk/reward columns. Find a spread to sell with around $15 or more profit potential and find a spread to buy with around $15 or more profit potential. Click on the ticket icons, verify the ceiling and floor meet the parameters listed above and place the trade. It is that easy.

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To set stops, simply double the amount in profit potential. For this trade at $30, that would be $60. Stop limit orders should be placed 60 pips above and below for exiting at a 1:1 risk/reward ratio. Maximum risk is when the market is between the two spreads at settlement and a profit is made when the market settles between the breakeven points. The breakeven points are the total profit potential in pips. For this trade, the breakeven points are 30 pips above and below from where the market started and settling anywhere between will make some profit. The Iron Condor is much easier than many think and really very simple when using the spread scanner.

For free day trader education and free access to the spread scanner visit Apex Investing.