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Trading Binary Options with the Straddle Trading Strategy

April 17, 2016

When it comes to trading the financial markets, there are numerous trading strategies which are specially developed to help traders see a better outcome with their trades. Often, they require a complex application of various trading tools which can make it confusing for more inexperienced traders to grasp what is actually going on.

Nevertheless, there are some trading strategies which are less sophisticated but equally effective which binary options traders can employ, which can help to minimize their trading losses in an uncertain market situation. The trading strategy we’ll look at today is called the Straddle Trading Strategy.

Source: thismatter.com

Source: thismatter.com

With binary options trading, you need to choose one asset direction during each selection process which is up or down. This by implication means your trade is either going to end up in the money or out of the money since you can only cover one side of the market. With the straddle trading strategy however, while you can’t simultaneously select both call and put option, you can still cover both sides of the market.

The idea behind the straddle trading strategy is that with both sides of the trade covered, the trade should end up in the money. Unlike trading with vanilla options, with binary options there is no guarantee that one of the trades will yield you a positive result. This is due to the fact that there is no binary options broker who is going to offer you the chance to make identical trades in opposing directions because you will always win. Nevertheless, it is still possible to ‘straddle’ your trade by entering into two separate trades one after another.

Applying the Straddle Trading Strategy
To straddle your binary options trade, first decide on the asset that you want to trade. Next, make two trades in opposing directions one after the other using one Call option and one Put option. With regards to the expiry time for both options, it is immaterial as the strategy is equally effective with the expiry times that are offered by your broker. For example, you can have a trade which expires in 10 minutes and the other trade set to expire in 30 minutes. Take note that while the expiry times don’t have to match, they must at least be made in the context of the current market conditions.

Calculating the Payouts
Before you start implementing the straddle trading strategy in your binary options trades, ensure that you have done some calculations to ensure that the payouts from the winning trades are sufficient to cover the cost of the trades that ended up out of the money. While it may seem simple enough, ensuring that you end up with some profit may require real mental deliberation. For example, let’s assume that you want to invest $100 on both sides of a currency pair price movement. If the percentage return offered by the broker is 85%, you will still end up losing even when one side of the trade ends up in the money. This is because your total investment cost is $200 while your return is $185. Even if the broker offers a rebate of 5% for the trade that ends up out of the money, you will still make a loss of $10 with your $200 investment.

The way to overcome this problem is to invest more in the trade that is more likely to win. Using the same example above instead of investing $100 on both side of the trade, you invest $200 on the side which you have more confidence in and $100 on the side that is less probable to close in the money. So if your choice is correct, you would have made a net profit of $70. If your trade closed out of the money instead, your losses would be limited to $115 instead of $200.

What is really interesting about this strategy is the fact that there is also a potential for a double win or double loss as you cannot make identical trades in opposing direction using binary options. Hence, always make the necessary market analysis to lay the groundwork for a successful trade.