Strangle & Straddle – Option Trading Strategies
Most of the articles here have talked about the importance of using various strategies to become successful at binary options trading. Different traders are comfortable using different strategies, but that is not a problem as long as the strategy you are using is producing profitable trades on a regular basis. If your strategy is not working then you should experiment with other ones. Two fairly popular strategies that work well are the Strangle and Straddle strategies.
So you know there are a lot of different trading options. It’s up to you to experiment with small trades to see how each works and if they are an understandable and profitable tool to put in your options trading toolbox. You can stick with simple strategies, such as just buying options or you could get involved in more complex trades where you do things like selling options before their expiration.
It is just a matter of how much time and effort you are willing to put into your trading. Strangle and Straddle strategies fall into the more complex area of binary options trading, but they are popular strategies none the less.
Strangle strategy starts out by you simultaneously placing put and call options on the same asset that are set to expire at the same time. It may seem a bit odd to do this, but it is allowed under the rules of binary options trading. It can also be a very profitable strategy if you initiate it in the right way backed with good technical analysis.
As with most trades, Strangle trading is very dependent on being able to make accurate assumptions about price movement and the direction it is trending.
The Strangle strategy works best when you buy your options at points where you feel your target asset should start significantly moving; don’t put any emphasis on small price movements. This significant movement can be upward or downward trending.
Once you have purchased your options under this strategy, you will now have put or call options with different strike prices. The key to generating profits with Strangle strategy is to be able to predict price release in a specific border corridor. If you were wrong in your trade forecast, the only thing you should lose is the amount of the premiums that you paid to buy the options.
Straddle strategy is a sister strategy to Strangle strategy and they are extremely similar. The only difference is when you initiate the trade, you place options on each trend that have the same strike price, not different strike prices like the Strangle strategy.
Each strategy has its advantages and disadvantages. Straddle strategy is cheaper to use, but it is also potentially less profitable. Once again, the method you choose to use usually comes down to which method you are comfortable using and is generating profits for you.
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References and Further Reading:
1. Two-Period-Ahead Forecasting For Investment Management In The Foreign Exchange (K KOZLOVSKIS, N LACE, J BISTROVA – 2012)
2. Forecasting Euro/Dollar Rate with Forex News (O Koshulko, M Alexandrov, V Danilova – 2012)
3. Application of time series models in forecasting exchange rate (A Sokhanvar – 2013)
4. Effects and influences of the opening up to the buy side of EBS and Reuters (M Bailey – 2006)
5. The Cost of Liquidity in the FX Market (M Borkovec, J Cochrane, I Domowitz – 2015)
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