The straddle, is one of the widely used strategies. It can be complex to use but is regarded as one of the best trading strategy to survive and profit in volatile market conditions.
Idea behind the straddle strategy is to place put and call option on the same underlying asset with the same expiration time. High fluctuations of market provide opportunity of placing call and put option on the same asset. However, this binary option strategy requires advance awareness of financial markets. For traders who are experienced and speculate with stock prices, the strategy – ‘straddle’ can yield great amount of profits and can become their specialty.
Now the question is how ‘Straddle’ strategy works?
As the word Straddle means to overlap, in this strategy it’s specifically about overlapping of profit. A trader buys a put option as the price reaches the highest level and buys a call option on the same asset when price is at the lowest level. This way a trader can place orders on both: call and put options, and have imaginary boundaries. Price fluctuations within the boundaries can double the profit. However if price exceeds any limit of the boundary, one of the options placed will still be in the money. When buying a binary option and trading it using the straddle strategy, a trader needs to rely on a speculation that prices will fluctuate. Trading straddle benefits from volatile nature of market and mostly those who love aggressive trading like the strategy as well.
When to use ‘Straddle’ strategy?
A trader might use the straddle trading strategy if he thinks that market will behave in one of the following three manners:
- If during a short period of time the market fluctuates with a huge margin in one direction.
- If in a short period of time the market change is volatile; in both directions up and down from a quoted strike price.
- Supposing that the perceived fluctuations will significantly move up in a short while.
If these scenarios are what the market is following, trader may invest in binary options trading using a straddle strategy.
For example, a trader decides to invest in currencies and chooses to trade USD/YEN. Considering that market is fluctuating and change is volatile. Investor might use straddle option to overcome the situation. Observing the peaks, the market reaches a highest point of 81.01. Investor places a put option. Similarly, call option is being placed at the lowest observed point of 79.56. Doing this will ensure that in any case trader is going to profit. If market price remains within 79.56 and 81.01, trader will double the profit. However, if a trade doesn’t double, one of the purchases will always be correct.
The best way to execute this strategy is to start an investment by purchasing any one of the options (call or put) with long expiry, observed market and wait it out to purchase your next option. This strategy is highly yielding and limits the risk. However, finding the right setup and time to execute the strategy can be difficult.