The North American Derivatives Exchange offers spread contracts. Like a binary option, a spread contract pays out when the underlying security closes higher or lower than the purchase price. Lower and upper bounds define a spread contract’s range. The current purchase price lies somewhere between these bounds, and the total profit or loss for any transaction is based on the initial purchase price.

Unlike binary options, spreads are not an all-or-nothing wager. The amount of your loss or profit is calculated by the difference between the purchased price and the expiration price; this is defined by the lower and upper bounds of the contract.

For example, let’s take the spread contract Wall Street 30 (Mar) 10400.00 to 10500.00 at 3PM. “Wall Street 30 (Mar)” is the underlying market, 10400.00 is the lower bound, and 10500.00 is the upper bound, and 3PM is the expiration time.

The current Bid and Offer prices for this contract will lie somewhere between 10400 and 10500, depending on the current price of the underlying security, the demand for this contract, and the time remaining until expiration For this contract, bid and offer prices are between 10400 and 10500, all depending on the amount of time remaining till expiration, the demand for this particular contract, and of course the current price of the underlying market. So, if you purchased one lot of this contract at 10450, maximum profit could be 10450 while maximum loss could also be $50.

There are two types of spread contracts offered on Nadex—five narrow spreads and one master spread. The master spread for forex contracts ranges anywhere from 300-750 points. The master spread is subdivided into five smaller, narrow spreads that range from 100-250 points each for Forex contracts.

Nadex’s spread contracts have a clearly defined floor and ceiling price, which limits the total profit and loss . Also, Nadex spreads do not have stop losses and Nadex does not offer leverage on their products.

Due to the larger spreads, it may be necessary to put up a larger premium to trade a spread contract than you would for a binary option. The profit or loss for a spread contract can be significantly larger than a binary option for the same contract size.

Perhaps the major differentiator between spreads and binary options is that spreads don’t expire at their max loss or profit. The total profit or loss per trade is dependent on the difference between the settlement price and the purchase price. On a binary option, if the settlement price is even one point below your purchase price, the contract settles at zero and the full maximum loss is incurred. In the case of spreads, the only loss is the difference between the purchase and settlement price, up to the maximum loss.

The main difference between binary options and spreads if that they offer different risk profiles. Binary options offer a wider variety of time frames (intraday, daily and weekly), and have a more consistent risk profile.

These products are volatile instruments that involve a high risk of losing all of your investment .  Past performance is not always indicative of future results