Bull Spreads 101. A Nadex Bull Spread is a limited risk contract which places an absolute floor and ceiling on a trader s losses and profits.

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1 Bull Spreads 101 A Nadex Bull Spread is a limited risk contract which places an absolute floor and ceiling on a trader s losses and profits. It is economically identical to a very short term vertical call spread. The only differences are: (i) (ii) To aid transparency, the price of a Bull Spread is referenced to the level of the underlying, rather than being expressed as a net option premium, and To ensure a trader s risk is always strictly limited, a Bull Spread is a single indivisible instrument rather than a combination of two individually tradable options. Bull spreads can be used to partially hedge positions in more conventional instruments. They can also be used to generate highly leveraged short term positions without exposing a trader to the risk of being stopped out by a temporary adverse move in the underlying market. Futures trading and options trading involve risk, which may result in financial loss, and are not suitable for everyone. 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. Past performance is not necessarily indicative of future results.

2 An Example Consider the following Bull Spread: EUR/USD - (3pm) This Bull Spread will settle at the spot E/$ FX rate at 3pm (ET), if the spot E/$ FX rate is between and * at that time. If the spot E/$ FX rate is lower than at 3pm (ET), it will settle at. If the spot E/$ FX rate is higher than at 3pm (ET), it will settle at. Note that the contract remains live until 3pm (ET), i.e. it will not settle early in the event that the spot E/$ FX rate moves below or above before that time. This means that a trader using a Bull Spread position cannot be stopped out by a temporary adverse move in the underlying market. Only contract expiration, or a deliberate closing trade, will close out a Bull Spread position. *Nadex calculates Expiration Values for the markets underlying its Bull Spread contracts according to the following algorithm: 1. Take the last 25 trade prices (for index and commodity futures) or midpoint prices (for spot FX) that happen before the moment of expiration 2. Remove the highest 5 prices and lowest 5 prices 3. The Expiration Value used to determine Bull Spread settlement is the arithmetic average of the remaining 15 prices rounded to one decimal point past the precision of the underlying market (with the exception of Wall St 30, which is rounded to the same precision as the underlying market) The market prices used by Nadex to calculate Expiration Values are obtained from a data feed from Reuters. If Reuters is unavailable, Nadex may obtain pricing data through Bloomberg or such other data provider as it determines appropriate under the circumstances.

3 Settlement Diagram The diagram below shows the relationship between the level of the spot E/$ FX rate at 3pm and the Settlement Value of the contract. Risk on the contract is strictly limited by its built in Floor and Ceiling. A trader with a long position can never suffer a settlement lower than. A trader with a short position can never suffer a settlement higher than. Note, however, that these absolute caps on losses also cap profits in the event of a favorable move. Settlement Value Ceiling Level Holding a long position in this contract is equivalent to holding a long position in a spot E/$ Call with a strike price of plus a short position in a spot E/$ Call with a strike price of (where both Calls expire at 3pm (ET) today). Floor Level Spot E/$ FX Rate

4 Bull Spread Prices Before Expiration In the hours before expiration the price of the contract can diverge from the underlying spot E/$ FX rate when that underlying rate gets close to the contract s Floor or Ceiling. When the spot rate is close to the contract s Floor, the Bull Spread will usually trade with a price slightly higher than the spot. When the spot rate is close to the contract s Ceiling, the Bull Spread will usually trade with a price slightly lower than the spot. Pre-expiration Bull Spread Price Bull Spread price lower than spot E/$ rate close to Ceiling This divergence from the spot rate reflects the optional insurance value of the Floor and Ceiling. The degree of price divergence near the Floor or Ceiling is a function of time to expiration, expected volatility and underlying level of the spot E/$ FX rate. Bull Spread price higher than spot E/$ rate close to Floor The greatest price divergence can be expected in volatile markets with lots of time until expiration where the spot is exactly at the Floor/Ceiling level; this is because it is under these conditions that the optional insurance offered by the Floor/Ceiling is at its most valuable Bull Spread price almost identical to spot E/$ in this range Spot E/$ FX Rate

5 Bull Spread Prices Before Expiration (cont.) The table below gives a typical network of three 3pm E/$ Bull Spreads that might be listed on Nadex. In this hypothetical example there are two hours left before expiration, spot E/$ is trading at and no major economic announcements are expected (i.e. volatility in the market is expected to be roughly average). Consider our example Bull Spread, highlighted in red: Contract Bid Size Bid Offer Offer Size EUR/USD (3pm) EUR/USD (3pm) EUR/USD - (3pm) Spot rate ( ) is below contract s Floor Spot rate ( ) in middle of contract s Floor/Ceiling range Spot rate ( ) is close to contract s Ceiling Spot E/$ bid at It can be seen that the - is trading 9 pips lower than the underlying spot rate. A trader taking a bearish view on spot E/$ would be giving up 9 pips by shorting the Bull Spread rather than the spot market Bull Spread bid at Spot E/$ 3pm - 3pm - Maximum risk: 13 pips Maximum profit: 237 pips However, by shorting the Bull Spread the trader would limit the maximum risk on the position to 13 pips for a possible profit of 237 pips. Moreover, this tight risk control would be achieved without the possibility of being stopped out over the next two hours, even if the spot E/$ rate temporarily rises above the contract s Ceiling. Establishing this position in a size of 10 lots would give a bearish expiration profile of $10 per pip (equivalent to a notional short spot E/$ exposure of 100,000), but would require just $130 in collateral. And $130 would also represent the trader s worst possible loss*. 10am 11am 12pm 1pm 2pm 3pm *excludes trading fees and commissions, which may vary by broker

6 Range of Markets We offer Bull Spread contracts based on: Equity Index Futures: US 500, Wall Street 30, US Tech 100, US SmallCap 2000, Germany 30, Korea 200, Japan 225, FTSE 100 Spot FX: Energy Futures: Metal Futures: Agricultural Futures: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, EUR/JPY, GBP/JPY Crude Oil, Natural Gas Gold, Silver, Copper Corn, Soybeans You can open a demo trading account and see our full range of markets in action. Futures trading and options trading involve risk, which may result in financial loss, and are not suitable for everyone. 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. Past performance is not necessarily indicative of future results.