Straddle strategy – definition of the straddle
A straddle is commonly defined two transactions that come with the same security and with positions that certainly offset one another. Therefore, the straddle strategy for binary options can be defined as a binary options strategy in which a trader holds a position in both the put and call with the very same expiration date and strike price.
Straddle strategy is best in trades whereby a trader is of the opinion that the price of a certain asset in binary trading will certainly move significantly but, at the same time, is not really sure towards which direction.
It is prudent to remember that the main goal of any strategy is to help the trader make profits whether the market is low or high. The price must move significantly if the trader is to make some good profits. In other words, if the movement in either direction is just small, then the trader is likely to make a loss.
At the same time, there are some very complex and sophisticated strategies and that is one of the reasons why the Straddle strategy for binary was actually derived to help out traders in their daily trading.
Straddle strategy – types of straddles
The following are the types of straddles that are in this strategy:
- Short straddle: this one requires a trader to sell both the call and the put options at the same price and the same expiration dates. When the trader does this, they will be able to collect the premium as the profit. For the trader to thrive while following the short straddle, the market should not be volatile or should be volatile for just a little while. In this type of straddle, the inability of the market to move up or down will be the sole determinant of what profit the trader will take home in their binary trading. In the event that the market starts moving either up or down, then the trader is at risk to lose money.
- Long straddle: this one has been designed around the buying of a call or put at the same expiration date and strike price. This straddle thrives well in a highly volatile market. It does not matter the direction to which the value of the asset moves as long as the trader will be able to take advantage of it.
The success or failure of any of the two types of straddles will be based on the natural limitations or strengths of the market and how well you are able to use the information you get to your advantage.
Straddle strategy – assessment of the two types of strategies
- The long straddle strategy
The long strategy helps a binary options trader to make profits whether the value goes up or down. The market can move up in 3 ways: sideways, up or down. In the event that it is moving sideways, it would be difficult to know if the value will go up or down. Normally, a trader has two choices if they are looking forward to being successful when using the long straddle. These choices are;
- The trader can hedge his bets and take both sides at the same time. That is the point where the long straddle for binary concept comes in.
- The trader can take any side and then just hope that the market favors him.
By buying a call or a put in binary trading, the trader grasps the movement in the market despite the direction in which it will move at. In the event that the market goes up, the call is there and, on the other hand, if the market goes down, then the put is there. Basically, the long straddle is designed to take advantage of the changes in the market prices by manipulating increased volatility.
The first rule that you need to learn here is that at-the-money options and in-the-money options are more expensive compared to out of the money options. At-the-money options can actually be worth several thousands of dollars and since the intention is always to get market moves, the expense might not equal the risk. All long straddles for binary trading have the following values:
- Intrinsic value
- Time value
In the event that the market is not volatile and consequently does not move up or even down, the put as well as the call options will certainly lose their value each day, something which will continue until the market moves to a certain direction.
2. The short straddle strategy
The short straddle in binary trading refers to a situation whereby a call and a put are sold instead of being bought in order to generate some cash from the particular premiums. That is the reason why seasoned binary traders believe that the strength for this strategy is, at the same time, its drawback. The disadvantage here nonetheless is the fact that when you sell an option you are exposed to unlimited risks.
Straddle strategy – When is it appropriate to use it for binary options?
The following are instances when the straddle strategy can be used to greater success in binary trading:
- When the market is moving sideways
- When there is some news waiting to be announced and that will affect the market
- When analysts predict that some news yet to be released will have an impact on the market
Usually, predictions by analysts on a certain pending announcement can impact the binary market a big deal. Most analysts make predictions weeks before the actual announcement, something which results in the market moving either up or down. People really don’t consider if such predictions are right or wrong, that is normally regarded secondary.
Once the real announcement is made, the market can react to the analysts’ predictions in either one or two ways. That is, the predictions can end up decreasing or adding to the momentum of the market’s actual price.
Straddle strategy – conclusion
Traders are subjected to a lot of pressure on whether to sell or buy, pay premiums or collect the same, but the fact remains that the straddle strategy for binary options is a great equalizer. That is for the reason that the straddles normally allow a binary options trader to let the market choose the direction it wants to take.