A straddle describes a trading strategy with classic options. Calls and puts are bought or sold at the same time and thus result in a completely different payout structure or distribution of returns than the purchase of a single option. To understand the meaning behind it, we briefly introduce straddles using classic options.
Straddles in binary options trading
There are two basic types of straddles:
- Long Straddle
- Short Straddle
In the first variant, the Long Straddle, you buy a call and a put option on the same underlying, with the same exercise price and same term. Let's take a look at the course of returns:
- If the price of the underlying increases, this results in a price gain through the call option and a price loss of the two options.
- If the price of the If the underlying falls, then this results in a price gain through the put option and a price loss of the two options.
So the strategy of long straddle is often traded when a strong market movement is expected, only that Dealers still unsure of the direction. If the underlying reaches the exercise price previously determined after the end of the term, both options expire because they virtually equalize with profit and loss. The trader then loses the price paid for both options, but no more. However, his chance of winning is unlimited.
In the variant of the short straddle, the trader sells a call and put option with the same characteristics. In this case, the trader only has to expect a small change in the prices, since it is better for him if the options expire. The trader collects the option premiums right at the start of sales and hopes that the underlying will be close to the strike price when the term ends. In contrast to the long straddle, this constellation leads to an unlimited risk of loss and a limited chance of winning.
Act long straddle correctly
Since binary options can only be bought, the short straddle is for us uninteresting at first. Its distribution of returns is also unfavorable. But what is quite interesting are the market conditions for which a long straddle can be traded, for example. As we have already shown above, a long straddle is useful when strong market movements are expected and the options are far out of the money.
How can you implement the whole thing with binary options? Let's look at a chart. In this case, it is a 4-hour chart of the EUR / USD currency pair. We need three things:
- The expectation of a strong move (trend) that we trade with a put option.
- The uncertainty about the further course that we will deal with Trade call option.
- A binary options broker that allows simultaneous trades, e.g. B. Anyoption.
We see a downward trend in the EUR / USD 4-hour chart. We therefore want to follow the trend and buy a put option that has a term of two days, for example. With binary options, however, we have to look very closely at the given situation, because we cannot afford to end with an option "out of the money", since with binary options the option price is higher than the profit per trade. If we make a profit with one option but a loss with the other, the difference is always negative in contrast to classic options.
So the plan is as follows:
- Put - Buy option if the price starts to weaken (e.g. double top or lower high)
- Buy a call option as soon as the price stabilizes again
the term of the call option should be shorter than that of the put option. If the process runs perfectly, both options should remain "in the money" after the end of the term and generate a decent return.
How To Straddle Trade In Binary Options
Trading and understanding straddles is already possible with classic options not easy. It is even more difficult with binary options. Still, if you do it right, a straddle strategy might work. With any position or with a demo account, the customer can try trading straddles with Anyoption.