An Introduction to Nadex

An Introduction to Nadex

AN INTODUCTION TO NADEX MULTIPLY YOUR TRADING OPPORTUNITIES, LIMIT YOUR RISK Discover a product set that: Allows you to trade in very small size (risking no more than a few dollars) Gives you the security of trading on a CFTC-regulated US derivatives exchange Caps your risk under all circumstances Provides you with multiple trading opportunities every day, no matter how quiet the markets are ABOUT US Nadex, the North American Derivatives Exchange, is a retail-focused futures exchange subject to regulatory oversight by the CFTC We offer easy to understand contracts which expire on very short time horizons (hourly, daily and weekly) and have a very small notional value (as little as $100) Our contracts are based on the world s major stock market indices, FX rates, commodities and economic events No other regulated exchange offers a product set like ours. Nadex s unique contracts are designed to combine small size and limited risk with a high degree of price action Nadex traders get the best of both worlds: multiple real-world trading opportunities combined with an absolute cap on risk ABOUT OUR PRODUCT SET We offer two classes of product: Binaries and Bull Spreads Both these classes of products have been designed to comply with the following core principles: Intuitive pricing. Our Binary prices can be thought of as percentage probabilities of market events occurring. Our Bull Spread prices are referenced to the underlying market, not to net premiums Very small contract size. The notional sizes of our contracts can be as small as $100, allowing you to scale in and scale out of positions with high precision Strictly limited risk. You can trade most of our contracts with collateral of less than $100, and you can never lose more than the collateral you have put down HOW DO OUR BINARY CONTRACTS WORK? Simple, easy-to-understand yes / no propositions, e.g. EUR/USD to be greater than 13000 at 3pm ET Intuitive pricing. At any point the price of a Binary is simply the market s perception of the percentage likelihood of the contract settling as a yes Very small contract size. At expiration each lot settles at $100 for a yes, $0 for a no. The maximum collateral required is always less than $100 per lot, often much less. And you can never lose more than your collateral Strictly limited risk. At no point can the contracts be priced outside the range 0-100, regardless of volatility in the underlying market. You always know your absolute worst case risk for any position you take, regardless of whether you are going long or short the contract Markets are open right up until the moment of expiration, allowing you to place orders to enter and exit a given Binary position multiple times as the market moves. Even though the contracts have an all or nothing payout, you are not restricted to an all or nothing trading strategy WHAT FACTORS MAKE BINARIES SO COMPELLING? Binaries are intuitive the Binary price is simply the market s view on the percentage probability of a given outcome happening. Because of this, Binaries can multiply the size of price action in a quiet market. If a Binary is at-the-money as expiration nears, small moves in the underlying can create large percentage swings in the price of the Binary. Despite these large swings, the design of our contracts means your risk is always known and strictly capped. You are always in control of your exposure. The following example illustrates this effect. An Introduction to Nadex, June 2013 Page 2 of 8

A HYPOTHETICAL EXAMPLE: EUR/USD TO BE ABOVE 13000 AT 3PM ET The chart below shows a hypothetical example of price action for spot /$, and a Binary based on spot /$, during the 20 minute run-in to the Binary s expiration. 13010 B 13005 D Spot /$ Rate 13000 12995 12990 12985 A C 12980 12975 Binary Price 100 90 80 70 60 50 40 30 20 10 0 As spot /$ moves through the strike price of the Binary (13000, shown as the thick red line in the top chart), the price of the Binary changes dramatically From point A to point B, /$ rallies by 0.18% The Binary rallies from a price of 4 to a price of 82, a 2000% increase in price From point B to point C, /$ falls by 0.09%, back through the strike price In response, the Binary price declines by 83% From point C to point D, /$ edges back up by 0.06% The Binary price rallies by 500%, from 14 to 84, in response You could trade in and out of this price action continuously as the situation unfolds. But at no point do you face unbounded risk and at no point do you face any demands for additional margin A trader buying one lot of a Binary at, say, 40 can never lose more than $40*. A trader going short of one lot at 40 can never lose more than $60* (100 minus 40) * Excluding commissions and fees An Introduction to Nadex, June 2013 Page 3 of 8

WHAT FACTORS MAKE BINARIES SO COMPELLING (CONTINUED)? Nadex offers a range of hundreds of different Binary contracts each day, with dozens of strike prices for each underlying market This variety of strike prices multiplies the trading strategies open to you The diagrams below show a typical subset of Nadex s US 500 contracts, which settle basis an Expiration Value calculated by reference to the CME E-mini S&P 500 Futures, together with representative prices before and after a major positive shock to the underlying market BEFORE Contract Bid Offer Daily US 500 (Mar) > 1255-2 Daily US 500 (Mar) > 1252 2 5 Daily US 500 (Mar) > 1249 8.5 11.5 Daily US 500 (Mar) > 1246 20.5 24 Daily US 500 (Mar) > 1243 37.5 41.5 Daily US 500 (Mar) > 1240 56.5 60.5 Daily US 500 (Mar) > 1237 72 75.5 Daily US 500 (Mar) > 1234 85 87.5 Daily US 500 (Mar) > 1231 93 95.5 Daily US 500 (Mar) > 1228 96 98.5 Daily US 500 (Mar) > 1225 98-1256 1254 1252 1250 1248 1246 1244 1242 1240 1238 1236 1234 AFTER Contract Bid Offer Daily US 500 (Mar) > 1255 21 23 Daily US 500 (Mar) > 1252 38 41 Daily US 500 (Mar) > 1249 55 59 Daily US 500 (Mar) > 1246 72 75 Daily US 500 (Mar) > 1243 86 88 Daily US 500 (Mar) > 1240 92 94 Daily US 500 (Mar) > 1237 95 97.5 Daily US 500 (Mar) > 1234 98 - Daily US 500 (Mar) > 1231 99 - Daily US 500 (Mar) > 1228 - - Daily US 500 (Mar) > 1225 - - A trader interested in taking a long-shot on a rally could buy the >1255 at 2, risking $2 to potentially make $98* A trader interested in selling volatility and backing a rally could buy the >1237 at 75.5, risking $75.5 to potentially make $24.5* A trader interested in taking a bearish view, but with no strong view on volatility, might sell the >1240 at 56.5, risking $43.5 to potentially make $56.5* These are just simple examples. There are many other possibilities and many other trading strategies that can be built with these contracts. * Excluding commissions and fees S&P 500 is a registered mark of the McGraw-Hill Companies, Inc. CME and E-mini are registered marks of the Chicago Mercantile Exchange Inc. Nadex is not affiliated with these organizations and neither they nor their affiliates sponsor or endorse Nadex or its products in any way. An Introduction to Nadex, June 2013 Page 4 of 8

HOW DO OUR BULL SPREAD CONTRACTS WORK? A simple option strategy, packaged as a single contract A Nadex Bull Spread is equivalent to a vertical call spread constructed out of very short term (intraday) calls. Each contract is a combination of a long position in a call with a low strike (the Floor) and a short position in a call with a higher strike (the Ceiling) Intuitive pricing. Contracts are not priced as net premiums but instead are referenced to the underlying Very small contract size. Our contracts have a per-point value of as little as $1, and the gap between Floor and Ceiling can be as little as 100 points. The maximum collateral required is always less than the Floor-Ceiling range, often much less. And you can never lose more than your collateral Strictly limited risk. At no point can the contracts price outside the Floor-Ceiling range, regardless of volatility in the underlying market. You know your absolute worst case risk for any position you take, regardless of whether you are going long or short of the contract The Floor and Ceiling cap risk without exposing you to the risk of being stopped out by a temporary adverse move in the underlying market The next few pages give an example of a typical network of Bull Spread contracts on spot /$ 100PT /$ FX BULL SPREADS EXAMPLE Spot /$ level at 7am 12850 12830 12800 12780 12770 12750 12730 12720 12700 At 7am ET, /$ stands at 12750 and the following overlapping 2hr FX Bull Spreads are created: /$ 12750-12850 (9am) /$ 12700-12800 (9am) /$ 12650-12750 (9am) Economic figures are expected at 8:30am ET. This network gives an FX trader several possible strategies for taking advantage of a market move caused by the 8:30am figures. Some strategies are very close to OTC spot FX trading, some are more sophisticated and option-like. All offer a high level of effective gearing*, all are strictly limited risk and none can result in a trader being stopped out by an intermediate adverse move. In the examples that follow, commissions, fees and bid-ask spreads are omitted for the sake of simplicity. In practice Nadex traders typically see bidask spreads of 2 pips for /$ FX Bull Spreads. 12670 12650 Key Spread Contract 2 hours to expiry Zone of linearity (price of FX Bull Spread is same as, or within 1-2 pips, of underlying spot market in this range) Total range covered by network = 200 pips * within each contract s Floor/Ceiling range An Introduction to Nadex, June 2013 Page 5 of 8

100PT /$ FX BULL SPREADS EXAMPLE (CONTINUED) 12850 The X against each contract shows the trading price of each Bull Spread at 7am. 12830 The 12700-12800 contract is centered on the current market level of 12750. The price of this contract is also 12750 it is the same as the underlying spot market and generally will remain so within approximately a 60-pip range. 12800 12780 12770 12760X A trader buying or selling this contract has both his potential maximum profit and his potential worst-case loss capped at 50 pips. Note that the position cannot be stopped out if the underlying market moves adversely beyond the range of the contract the contract remains live until expiry, regardless of underlying market movement. Spot /$ level at 7am 12750 12740X X12750 12730 12720 12700 12670 12650 Key Spread Contract 2 hours to expiry Zone of linearity (price of FX Bull Spread is same as, or within 1-2 pips, of underlying spot market in this range) Total range covered by network = 200 pips 12850 12830 The 12750-12850 contract has a floor at the current market level of 12750. The price of this contract is 12760 it is 10 pips higher than the spot rate, reflecting the optionality inherent in its design. For a trader buying this contract, potential profits are capped at 90 pips but losses are capped at just 10 pips. Spot /$ level at 7am 12800 12780 12770 12750 12730 12760X 12740X X12750 The 12650-12750 contract has a ceiling at the current market level of 12750. The price of this contract is 12740 it is 10 pips lower than the spot rate, reflecting the optionality inherent in its design. Again, a trader selling this contract has potential profits capped at 90 pips but losses capped at 10 pips. Note again that, in either case, the trader cannot be stopped out if the market moves adversely against them beyond the range of the contract the contract remains live until expiry, regardless of underlying market movement. 12720 12700 12670 12650 Key Spread Contract 2 hours to expiry Zone of linearity (price of FX Bull Spread is same as, or within 1-2 pips, of underlying spot market in this range) Total range covered by network = 200 pips An Introduction to Nadex, June 2013 Page 6 of 8

100PT /$ FX BULL SPREADS EXAMPLE (CONTINUED) 12850 12847 Five minutes after the release of the economic figures, and after considerable whipsawing in the market, spot /$ is trading higher at 12825. Spot /$ level at 8:35am 12800 12797 12825X X12798 The 12750-12850 Bull Spread is trading at 12825, exactly the level of the underlying market. A trader who had bought this at 12760 would be sitting on a 65 pip profit as a result of the 75 pip favorable move in the underlying. But at no point in that move would he have risked more than 10 pips, and at no point would he have been in danger of being stopped out. 12753 12750 12747 12749X The 12700-12800 Bull Spread is trading close to its maximum value, at 12798. A trader who had bought this at 12750 would be sitting on a 48pip profit; a trader who had sold this at 12750 would be sitting on a 48pip loss. The 12650-12750 Bull Spread is also trading close to its maximum value, at 12749. A trader who has sold this at 12740 would be sitting on a loss of just 9pips, even though the underlying spot moved against him by 75pips. 12703 12700 12652 12650 Key Spread Contract 25 minutes to expiry Zone of linearity (price of FX Bull Spread is same as, or within 1-2 pips, of underlying spot market in this range) Total range covered by network = 200 pips An Introduction to Nadex, June 2013 Page 7 of 8

FX BULL SPREADS WHY SO MANY CONTRACTS? Spot /$ Single Daily FX Bull Spread, range = 600 pips Path of spot /$ over day T (end of Time day expiry) Network of 3 2-hour FX Bull Spreads, range = 100 pips each Network of 3 8-hour FX Bull Spreads, range = 250 pips each Nadex offers networks of FX Bull Spreads of varying widths and with varying expiry times. Each network, when created, is centered on where the spot market is at time of creation. In total, Nadex offers 70 Bull Spread contracts per currency pair per day. The fact that there are so many contracts, and that they have floor/ceilings governed by the level of the underlying spot rate when they were established, means that traders can almost always find a contract floor/ceiling in the vicinity of the current spot rate. This means that sophisticated traders are assured of the opportunity to generate high leverage on a directional view. It also means that traders familiar with the OTC spot FX market can almost always find contracts that behave linearly and are priced in line or very close to the underlying spot rate. Whatever the style of the trader, Nadex Bull Spreads will tend to have a high level of effective gearing (compared to conventional spot FX), will always be strictly limited risk and will never cause that trader to be stopped out by an intermediate adverse move. RANGE OF MARKETS We offer contracts on: Equity Indices: US 500, Wall Street 30, US Tech 100, US SmallCap 2000, Germany 30, Japan 225, FTSE 100 Spot FX: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, GBPJPY, EURJPY Energies: Crude Oil, Natural Gas Metals: Gold, Silver, Copper Agriculturals: Corn, Soybeans Economic Events: Initial Jobless Claims, Fed Funds, Nonfarm Payrolls Futures, options, and swaps trading involves risk and may not be appropriate for all investors. Any trading decisions that you may make are solely your responsibility. The information presented herein is for informational purposes only. The contents hereof are not an offer, or a solicitation of an offer, to buy or sell any particular financial instrument offered on Nadex. North American Derivatives Exchange, Inc. 311 South Wacker Drive Suite 2675 Chicago, IL 60606 Phone: 312-884-0100 Fax: 312-884-0940 Email: customerservices@nadex.com www.nadex.com An Introduction to Nadex, June 2013 Page 8 of 8