Strangle vs. Straddle Binary Options Trading Strategies

If you are interested in Binary Options trading instead of or in addition to trading Forex you should think about the fact that what you need to do to achieve success because it is completely different between the two.


When you are trading Forex the things are very straightforward. You are just making bets on the next directional movement of the price. If the price is at 1.00 and you expect it to reach 1.01 before 0.99 you can enter a long trade with a stop at 0.99 and a take profit at 1.01.


When you are trading Binary Options the things can get much more complicated. You could be betting on a few different things such as your belief that the price at the end of the day will be above a certain level but not by enough to justify a Forex trade making a Binary Options trade the more logical option in terms of profit. Alternatively you might be betting that the price will be going nowhere for a while. Binary Options are very often useful as trading instruments for drawing an “envelope” around the price beyond which you do not expect the price to go. This can be a good way to take some profit out of a quiet or ranging market that can not really be done by trading Forex. Alternatively you might want to use Binary Options to hedge trades either alone or in addition with a Forex trade. In order to execute these types of operations you need to understand some Binary Option Strategies: the two most important are the strangle Binary Option strategy and the straddle Binary Option strategy.


Strangle Binary Options StrategyThe Long Strangle


The long strangle Binary Options strategy is a strategy which you can use when you expect a directional movement of price but you are not sure in which direction the move will go. In this strategy you buy both call and put options with different strike prices but with identical expiry times. Exactly which strike prices you buy them at is something you can use to implement whatever expectations you have. E.g. if you think a breakout with an increase in price is more likely you can make the strike price of the Call Option relatively low and the strike price of the Put Option relatively high. The most you can lose is the combined price of the two Binary Options whereas your profit potential is at least theoretically unlimited.


The Short Strangle


The short strangle Binary Options strategy is a strategy which you can use when you expect the price to remain flat within a particular range. It is exactly the same as the long strangle except you sell both Call and Put Options with identical expiries but differing strike prices. The problem with this strategy is that your losing trades are usually much bigger than your winning trades. It usually makes sense to choose expiry prices which match the limits you expect the price to remain within at expiry from the current price.


Straddle Binary Options Strategy


The long and short straddle Binary Options strategies are just the same as the strangle strategies described above with one important difference: the Call and Put Options which are bought or sold should have identical strike prices as well as the expiry times. With the long straddle strategy as long as the price at expiry is far enough away to ensure a profit on one of the Options which is larger than the combined premiums of the Options the combined expiry will be in the money. The short straddle strategy is even riskier than the short strangle strategy as there is no range for the price at all beyond the value of the Option premiums.


The most logical way a trader should begin to try to profit from these kinds of strategies would be to look for a currency pair where there is strong resistance overhead and strong resistance below and enough space in between for the price to make a normal daily range. A short strangle with the strike prices just beyond the support and resistance levels could end with a nice profit.


Vice versa if the price is coming to the point of a consolidating triangle where it has to break out a long strangle or straddle could be suitable. If the triangle shows a breakout to one side is more likely you can adjust the strike prices accordingly to reflect that.