Trading the price of oil using Nadex Knock-Outs
In this video, we’ll show you how to go long or short oil in a limited risk/limited reward way using knock-outs. Let’s get started.
Once you’ve logged onto your Nadex trading account, on the top left hand side of the platform, click “Knock-Outs” and then “Commodities”. Under “Crude Oil” you’ll see the various ranges for knock-outs that are currently available. Knock-outs have a weekly expiration.
Next, click on the specific contract you’re interested in to populate a chart of oil as well as bring up an order ticket on the right-hand side of the platform.
On the order ticket you’ll see the specifics for that oil knock-out which defines the range of the contract, the current indicative price of oil, and when the contract expires. For crude oil, the range is always $5. In this example, the terms of the knock-out are: This Crude Oil (Jun) 15.50-20.50 contract expires @2:30PM (at the end of the week).
If you predict the price of oil is going to rise, you “Buy” a price level to initiate the trade. The range boundaries around your entry price indicate where, if touched, you’d be knocked-out of the trade either for a profit if the upper limit is touched (20.50), or a loss if the lower limit is touched (15.50).
If you predict the price of oil is going to decline, you “Sell” a price level to initiate the trade. Again, the range boundaries around your sell level indicate where, if touched, you’d be knocked-out of the trade either for a profit if the lower limit is touched (15.50), or a loss if the upper limit is touched (20.50).
The price of the knock-outs will constantly fluctuate as the underlying price of oil changes. In fact, the price levels you trade for knock-outs will typically track the underlying price of oil. For example, if the indicative underlying price of oil were 17.30, you might see the bid-ask spread for the knock-out to be 17.28 to 17.32. Those are the levels that you could either buy or sell the knock-out.
Essentially, when trading knock-outs, you predict whether the price of oil is going to rise or decline, and you have distinct knock-out levels to either take profits if you’re right, or to limit losses if you’re wrong. On Nadex charts you can quickly and easily identify which knock-out range best suits your trade around the current indicative price of oil. At the bottom of the ticket, your potential max profit or loss is clearly calculated before you enter a trade, whether you’re buying (going long) or selling (going short).
An important note when trading knock-outs: you can exit a trade early. Just because there’s an expiration associated with the contract does not mean you have to wait until expiration to see what happens. You can choose to close a position early if you’d like to lock in profits or limit losses. To close a long position, you’d simply sell it at the current market price. To close a short position, you’d simply buy it back at the current market price.
If the price of oil doesn’t touch either the upper or lower range of the knock-out, the contract will settle at a price at expiration. The profit or loss on your trade will be the difference between the price level you bought (or sold) and the settlement price excluding any exchange fees.
And there you have it. You can now leverage Nadex knock-outs to trade the price of oil, whether you predict it’s going up or whether you predict it’s going down.
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