Straddling is among the most popular of all binary options strategies. The reason for this is because when this strategy is used correctly, it greatly reduces the risk of losing money on your investments. This method of trading is derived from both the traditional markets and Forex markets, but the method has been adjusted to work within the digital options arena.
In order to straddle a trade, two different positions will need to be purchased using opposite price movement predictions – one Put and one Call. While this may sound like a crazy idea, within a platform that allows you to purchase these two options on the same exact trade, one of the two options must finish in the money. The goal is to have the profitable position yield a profit amount which exceeds the cost of the two trades.
Some basic math will be required to determine whether or not there is money to be earned. For example, consider the purchase of a pair of $10 options that offer a return rate of 80%. The upfront cost is going to be $20, but the total profit potential for the one winning trade is only going to be $18. One of the two positions must offer a return rate that is higher than the other if there is any profit to be made. If not, there simply is no reason to use this strategy.
Since two positions will be purchased and one must offer a higher return rate, the focus needs to be on which of the two binary options trades you feel is most likely to finish in the money. That position needs to be the one which carries the higher return rate. It is entirely possible that the lower paying position may be the one that finishes in the money. The good news is that by straddling, the overall loss amount is going to be kept to a minimum.
Not all brokers allow for identical positions to be purchased using opposing positions. In this case it is possible to purchase opposing trades that have expiry periods that start and end one right after the other. In doing so, both trades will be subject to the same type of market conditions. When this form of straddling is used, it will be possible for both positions to finish either in or out of the money. The prospective reward will be higher, but so too will the risk.
The straddle strategy can be used both as a profit generator and a loss minimization method. Although some market analysis is highly advised, when purchasing identical options with different predictions one must finish in a profitable position whether you’ve studied market conditions or not. If this is not possible within your chosen platform, consider market analysis to be a must. Be sure to work though the return rate numbers prior to using this binary options strategy and there should be no major problems.