The straddle strategy is a popular trading strategy in regular trading. It involves buying a call and put option with the same price and expiration date. Many traders making the switch to Binary Options are now wondering whether they can adapt the straddle strategy to Binary Options trading, and which modifications need to be made.
What is the straddle strategy?
In regular trading, the straddle strategy is used when a trader is expecting the price of an underlying asset to fluctuate, but is unsure of the direction of the movement. By buying call and put options the trader can benefit from a price movement in both directions. If the movement is big enough, the amount won with one option will cover the cost of buying the other and still leave a sizeable profit.
For example, let’s imagine a stock that is presenting its quarterly report today. There are certain expectations to this report.
If they will be met, the price for the stock will rise significantly; if they won’t be met, the price will fall significantly. This is the perfect scenario for a straddle. By buying a call and a put option at the same price, the trader can cover both options, and benefit from the large movement the report will create.
Adapting the straddle strategy to Binary Options
Adapting the straddle strategy to Binary Options is not easy. If a trader tries to apply the straddle by purchasing a High or Low option in both directions with the same expiration date, he will run into problems.
The problem with adapting the straddle strategy to Binary Options is that the winning percentage in Binary Options is fixed and does not depend on the size of the price movement. Therefore, it will not be able to cover the cost for the option that will be lost with a High or Low option.
Let’s look at this mathematically: Typically, the winning percentage of any High or Low trade will be between 70% – 90%, and you will win 50% of all trades with a straddle strategy. This means, that after you traded this strategy for a while you will end up with at best 190% * 0.5 = 95% of the money you invested. In other words, you will lose money if you use the straddle in Binary Options with High or Low options.
What alternatives are there?
To successfully use a straddle strategy with Binary Options, you need to win more than 100% of your invested amount if you are right. One way to this is the touch option. The touch option enables you to win as much as 500 percent if your prediction is right.
The strike price, however, is usually far from the current price. If you are expecting a large price movement but are unsure of the direction you can use the straddle strategy and buy touch options in both directions. If your prediction is right and the price will touch one of the two options, your profit will cover the loss from the other touch option and still leave a sizeable profit.
The easiest way, however, to trade a straddle in binary options is by buying a boundary option. A boundary option defines a lower and an upper price level. You can predict the price for an asset leaving these boundaries. If you are right, you will win the trade and get a good winning percentage from your broker. The boundary option therefore is a straddle in itself without the need to purchase two options.
If you are planning on trading the boundary make sure your broker offers boundary options. We have created a list of the best brokers that offer the boundary option for you.