News

US Exchange NADEX Lowers Strike Width on Low Volatility

September 24, 2016

Officials at the North American Derivatives Exchange (NADEX) announced on Thursday that the exchange would be narrowing its strike widths after the US volatility index plummeted. The changes were made to encourage higher volumes of trading even at lower levels of volatility, ensuring that there are plenty of opportunities for traders even during periods of low volume. The changes will affect contracts with different expiration periods throughout the day and will generally be focused around US Tech 100 binary contracts along with US 500 binary contracts.

nadex-review-logo

US volatility, measured by the Chicago Board Options Exchange Volatility Index which tracks price movements in the S&P 500, has been trending lower in recent days, before plummeting following the US Federal Reserve’s decision to abstain from raising interest rates on Wednesday. While equity markets around the globe rallied in response to the decision, the result was lower volatility in equities across exchanges, pushing NADEX to move forward with their corrective actions.

Volatility Falling

NADEX was pushed into action this week to narrow their strike widths as volatility in financial markets trended lower, making options trading in general less appealing because of the widened spreads. Volatility was especially low during the summer months, corresponding with historical seasonal patterns, with the lone exception being in late June following the UK’s “Brexit” referendum which sent global markets briefly into a panic. Outside of that single spike, the Volatility Index (VIX) has remained fairly muted, remaining below 20.00 for most of 2016.

After seemingly spiking upwards again earlier in the week, volatility plummeted on the news that the US Federal Reserve would leave their benchmark Federal Funds rate untouched for another 6-weeks at least, temporarily calming financial markets and pushing the likelihood of any action until the last meeting set to be held in December. The decrease in volatility has been unhelpful to intraday and binary options traders, who have seen spreads between strike levels and underlying asset prices remain wide despite smaller price fluctuations.

As a result, NADEX announced on Monday that they would be narrowing their strike widths for a variety of contracts. The move is an attempt by the binary options exchange to make trades more appealing to investors who would otherwise avoid investing during periods of low volatility. The new ranges extend for contracts throughout the day, as well as periods of time, though are mostly focused on 20-minute intraday contracts.  This means that investors will still have access to potential opportunities even with the weaker volatility outlook.

Analysis and Outlook

NADEX’s corrective measures could prove to be a boon for US-based traders who might struggle during periods of low volatility. By narrowing their strike widths, NADEX has increased the number of opportunities available by enabling traders to capitalize on smaller intraday price fluctuations.

In terms of volatility, markets should remain relatively calm over the short-term, as the Fed’s decision helped soothe concerns that higher rates could tip the economy into a recession and spell major trouble for risk asset valuations. Instead, there is very little likelihood that the Fed will move to raise interest rates at any point before the Presidential elections during the November 2nd meeting. If the Central Bank chooses to raise rates, it will most likely do so during their December meeting, where markets have priced the likelihood of a rate hike above 50.00%.

For US-based traders, NADEX’s narrowing of strike widths could prove advantageous, as volatility levels remain low thanks to a more stable outlook.  However, December could present a new set of risks that sees volatility rebound once more.