Strangle vs. Straddle Option Trading Strategies

Strangle vs. Straddle Option Trading Strategies

Submitted by adil on Fri, 01/24/2014 - 12:00

If you have been trading Forex successfully but also want to venture into binary options market, you need to implement totally different strategies to succeed. Things are very easy and straightforward when you trade spot Forex as you simply make predictions about the next possible price movement direction and bid accordingly.

However, binary options trading is not as simple as Forex because you might have to predicting about different price movements and bet on many different things. In fact, if you are looking to earn reasonable amount of profit, binary options is much more logical trade as compared to spot Forex. For example, you are sometimes of the opinion that the price will cross a certain level at the end of the day but it is still not good enough to place the trade. On the other hand, you can also predict that price will remain stationery for major part of the day.

Sometimes binary options traders also create a sort of a “zone” whose boundaries are difficult for price to breach. This strategy provides traders a good opportunity to take some profits from ranging or quaint markets that Forex trading is not able to provide. Similarly, you can also join hedge trades through binary options again with the opportunity trade alone or become a spot Forex member.

Before you start trading binary options, you need to grasp some important option trading strategies. Important ones are as under:

 The Strangle Options Strategy:

The Strangle Options Strategy is further divided into two types.

• The Long Strangle:

This particular strategy is used when you want to bid on a price movement with uncertain direction. In this strategy, traders usually purchase both put and call actions with identical expiry times but different strike pieces. The exact value of strike price actually helps you to predict according to your expectations. For instance, you can make the strike price relatively low and high for the call option and put option respectively if you believe that a breakout with increasing price is highly possible. In this case, you can take unlimited profits and you cannot lose more than combined price of the two options.

• The Short Strangle:

Trades utilize this strategy when they believe that price will remain static within a given range. In this strategy, traders sell put and call options with identical expiry times and different strikes rates rather than buying them. The only problem with this strategy is that you can lose much more than you actually gain.

Straddle Option Strategy:

Straddle options strategies are similar to the strangle option strategy with the only difference that put and call options have identical strike prices and expiries. In long straddle strategy, the money contains the combine expiry as long as price is bigger than combine premiums of the options and thus far enough to ensure profits. In short straddle, price cannot go beyond the given range at all making it even more risky than the short strangle strategy.

As currency pairs offer strong resistance below and some resistance above, they are best option to use for making abovementioned strategies more profitable. This is because they allow the price to move within normal daily range by offering enough room between two resistance levels.  In this particular case, traders can take good profits by implementing a short strangle with strike price just beyond the resistance and support levels.