Binary Options Straddle Strategy
In all of our binary options review so far, we have always emphasized important level of building your own trading strategies in order to obtain all potential profits as well as reduce bad effectiveness of unexpected situations. We don’t mention about experienced traders, because they have been used to utilizing their strategies successfully. This article is entirely for new comers, who have less experience and knowledge of how to take advantages of such strategies in the most effective way. Let’s start immediately with one of the most popular trading strategies named Straddle.
In traditional way, binary options mean you have to choose either Call or Put, and it’s the only choice for a particular transaction. Meanwhile, the Straddle strategy essentially means being on both sides, which you will two different located positions on one single trade. It sounds really simple that you only have to pay 2 amounts for 2 opposite choices, but the difficulty is how to balance accurately between the initial investment amount and the real profits.
Moreover, there are 2 concepts of straddle so you also have to learn how to choose the most suitable one. They are the long straddle and the short straddle. As a result of a comparative classification, sometimes with one asset in the same conditions of strike price, expiration, etc…, the purchase is referred to as a long straddle while the selling is oblique as a short straddle. However, they both contain their own characteristics, which must be learnt thoroughly in order to apply cleverly in specific situations.
Features of Long Straddle Strategy
The long straddle strategy fits perfectly with the situation of a substantial difference between the market price and the strike price of an underlying asset.
As a common characteristic of straddle strategies, this long one requires a trader to buy both the Call and the Put options of a particular asset on each transaction.
You need to update recent market price of your chosen asset before deciding to choose either Put option or Call option to earn bigger benefits.
Put option should be used when the price of the underlying asset tends to be higher. Meanwhile, if you predict that in the near future, the price will be lower, Call option is a better choice. Since you have invested in both sides, one of the outcomes is definitely true at expiration time.
Obviously, relative risks of each transaction will be reduced with the help of the long straddle. You have your payout no matter where the asset’s price locates at the end of the time.
The disadvantage of this strategy is that this long straddle can only promote its advantages in the most effective way in a volatile market. In other conditions, its performances are not as good as expectations.
Here is an example for such specific situations. ABC Company announces its earning statements quarterly. Each announcement will definitely influent its market price location on stock market. You have invested in ABC Company stocks and you understand that there will be a substantial price movement at the time of announcing for sure. Unfortunately, you have no idea which direction it will move. It’s high time to take advantages of long straddle strategy in order to manage your profits regardless to where the price will move to. Thanks to using this strategy, you don’t have to worry about being out-of –the-money at the end of the transaction. Sufficient earning profit will compensate you for your additional investment in case your chosen asset moves far enough.Long Straddle Strategy would be perfect for broker like Optimarkets.
Features of Short Straddle Strategy
Short straddle strategy should be employed when you are about to sell your current asset. You sell an asset using both the put and call options at the same strike price and date of expiration.
It’s profitable higher when the market price of your underlying assets locates very close with its strike price.
In contrast to the long one, the short straddle strategy is a non-direction. While the long straddle is sole effective if there was a big difference between the strike price and the expired price; the short straddle strategy is successfully used if the price of the asset stays steady or varies very little in comparison with the initial.
Basically, as payout is based on the premium amount on the asset; the loss is calculated on the basis of how much the price of the asset has varied.
The most suitable moment of the market to employ the short strategy is when the market price only moves in the sideways direction or changes insignificantly. In order to grasp such favorable situations for utilizing the short straddle, you have to update market news regularly. They usually happen when economic and political news or earnings and analysis announcements are about to be published in the very near future, in which the asset’s price generally stays stable.
The short straddle strategy also contains unexpected results. You may have to face with huge losses if the market price suddenly changes easily. The decision of selling the call and the put might lead to huge losses on the call; and larger than or equal losses to the strike price on the put.
In spite of all detailed instructions, some new comers will still find it slightly difficult to understand these trading strategies thoroughly. Bear in mind that all investors have the same jump-off, but the successful is the one that knows how to accumulate experiences after each failure. Thanks to experiences of seniors, many traders have success with the long and the short straddle. Therefore, you just need to practice both strategies on demo account to be a professional of real market. This strategy would be perfect for StockPair, leading binary options brokers!