How To Do Premium Collection Trades Everday in Downward, Bearish Markets Using Nadex Spreads!

Nobody likes paying insurance premiums, but what if you could collect insurance premiums? In a previous article, we looked at how to profit doing a premium collection trade using Nadex spreads in an uptrend or a flat market. You can also collect premium using spreads in a downtrend. Premium collection trades are basically trades that collect money for time passing. Think of it like an insurance policy with 30 days on the policy. You pay 30 days of premium to get coverage. After 30 days, you are out your premium and the insurance company has made it. Well, you could be the "insurance company" per se. You could be the one collecting the premium, instead of the one paying it when it comes to trading in the markets. This would make you a premium collection trader. And if you do this on Nadex, you can do it with completely defined risk. When markets are flat, when there is a lot of time still in a trade, when a trade is deep in the money, or when there is a lot of implied volatility, such as during news events, those are times you can find premiums to collect. What you want is enough profit potential and premium to make money when, and if, the market stays flat, or if it moves slightly against you, and of course, if it moves in your favor. That is when you may collect even more! With premium collection trades you will want to manage your risk by knowing when to exit a trade in order to help balance out your risk to reward ratio. Due to this, it’s important to understand and know where your breakeven point is, and where your 1:1 risk reward ratio is as of expiration, as well as while in the trade.

Again, for this example, like we did in the last article, we will use a Crude Oil Nadex spread. Crude Oil tends to be a volatile market and often has premium built into it. Also, notice this spread has less than a day to expiration as do all spreads on Nadex. This gives you these opportunities on a daily and often multiple times in a day to do premium collection trades. This particular spread is a good example to show premium and how the trade works. The key here is the price and its proximity to the underlying market. Remember, spreads have a floor and a ceiling level. When selling a spread, the distance between the entry price and the ceiling is the max risk, and the distance between the entry price and the floor is the max profit. Every tick on a Nadex spread is worth $1.00. You can do one spread, 100 spreads or 200 spreads etc... Whatever the liquidity of the market allows.

If you look under max profit, you see there are still 22 ticks of profit available. However, look at the proximity to underlying. It says 56. That means that this spread’s price is 56 ticks above the current underlying market’s price. Or, said another way, the underlying market is already 56 ticks below the spread bid price of 103.24. Normally, the price would be below the spread's price. If it was, that would be a trade where you are paying the premium instead of collecting it. You have more potential profit doing a premium payment trade, but the market has to move in your favor in order to profit. If you use a trade that has an inverted proximity to the underlying, (a positive instead of a negative number for proximity to underlying), then you can collect the premium if the market stays flat, goes down, or even moves up against you slightly.

Remember you are short. This means that since you sold this spread, the underlying would have to go up, to the floor of the spread 103.00, before you could lose profit, or up 56 ticks to break even. Where would the 1:1 risk reward ratio be? The market would have to move up 56 ticks for break even, and then another 22 ticks, or 78 ticks total, for the 1:1 risk reward ratio point, at expiration. Therefore, the market can continue down and you can make up to 22 ticks. It can stay flat and you can profit up to 22 ticks. And it can move against your spread, up to the floor of 103.00, before you start to lose profit as of expiration! This trade allows for the opportunity of a profit potential of a bit over 4.5% on your investment in a single day.

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Of course, you don’t need to stay in the trade until expiration should it move in an unfavorable direction. You can exit earlier, potentially at the breakeven point, if enough time has passed or the 1:1 risk reward ratio point; depending on how much premium you have collected through time passing, or at any point you so choose. You can also take profit should it stay flat or move in your favor to lock in your profit. Premium collection trades can involve more risk, but if you know ahead of time where you are going to exit and when, you can manage it within your trading plan.

Be sure to look for our next article where we will put the two premium collection trades together for what is called an Iron Condor trade. We will look at the risk reward when buying the bottom range spread Crude Oil (Apr) 98.00-103.00 and selling the top range spread Crude Oil (Apr) 103.00-108.00.

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For more information on Nadex spreads, how to trade them and get access to the free spread scanner, go to www.ApexInvesting.com. To practice trading spreads on a free demo account, go to ww.nadex.com and click on trading demo, trading account.

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