In basic binary options trading, a trader would either take a PUT or CALL options position. But, what if you could simultaneously take both positions? The straddle strategy allows you to do just that—you can take both CALL and PUT options using the same strike price and within the same expiration period.
How Does The Straddle Strategy for Binary Options Work?
This strategy is effective especially when you are unsure whether the price movement of an asset will move up or down, but you are sure that prices will undergo significant fluctuations. To profitably use the straddle strategy when trading binary options, the fluctuations in price movement must be considerably large; the price movements must take place within a short period of time; and there must be a significant increase in the market’s implied volatility.
The concept behind straddling is that whether the price of the asset swings above or below the strike price, you would still end the trade session in the money. However, this does not mean that you will be able to profit from taking one of the two options positions. Most trading platforms that allow straddling will let you to either take a CALL or PUT position simultaneously or one after another, so you can cover both the CALL and PUT option positions.
How does the straddle strategy work?
To get started, chose an asset that you want to trade. Then, enter into a PUT and a CALL position for the same asset. You can use any expiry period with this strategy; although you can choose different expiries for each of the options, applying the same expiry period will be helpful in increasing your chances of making a profit. At the end of the day, either the CALL option or the PUT option will win. As such, you want to ensure that the amount of money you invest in purchasing these two options will be enough to compensate the cost of the lost trade and to receive significant profits.
Look at it this way: If you invest $10 each to buy CALL and PUT options, your initial investment would be $20. Now say your broker offers a 70% payout of the initial investment and the trade ends in the money for one of the options, you would have made more losses than profits. Your returns would be $13.5 when your total investment was $20.
To maximize profits and minimize losses using this strategy, you want to put in a greater investment amount into either the CALL or PUT option depending on the trade that looks most promising. For example, seeing previous example, if you feel confident about a CALL option trade, you could invest $35 on that and perhaps put in $10 on the PUT option trade for a similar payout.
Perhaps the greatest advantage of the straddle strategy for binary options is the equal loss or profit potential. Obviously, your ability to maximize profits and minimize losses will largely depend on your analysis and understanding of the market. Remember that implied volatility can increase the value of the options and in turn maximize your chances of profitability.