Pros and Cons of Different Binary Option Strategies

Pros and Cons of Different Binary Option Strategies

Submitted by adil on Fri, 08/01/2014 - 09:01

What's the Best Strategy for You?

In order to fully benefit from binary options, you need to understand many strategies. Depending upon your preferences, following two types of strategies may be most suitable for you:

1. Strangle strategies
2. Straddle strategies

Strangle strategies:

Strangle strategies can be viewed as a hedging strategy where the trader tries to balance his losses with the winnings. It is useful when the trader is unsure in which direction the asset price will move. The two well-known types of strangle strategies are:

• Long strangle strategy: This strategy is used when the price is expected to make a directional move, but you are unsure in which direction price will move. In this strategy, you must buy both call and put options, the strike prices can be different but expiry times must be the same. How much difference you keep between the strike prices of two trades depends upon your expectations.  If you think an increase in price will occur, you can keep the strike price of the call option low and strike price of the put option relatively high.

Pros and cons: The highest possible loss in such a scenario is the total cost of the two trades, whereas the profit margin is many folds.

• Short strangle strategy: If you think the price of the underlying will remain flat within a particular range, then such strategies are very useful. In this strategy, matching the strike prices of both call and put trades with the upper and lower limits of the range you think the price movement will remain in-between is very crucial.

Pros and cons: The only problem in this strategy is that, in some cases, your losing trades will become much bigger than your winning trades, depreciating your investment capital considerably.

Straddle strategies:

Concept-wise, the straddle strategies are very similar to strangle strategies. There are two types of straddle strategies:

• Long straddle strategy: This strategy is same as long strangle strategy, but you need to keep the expiry times as well as the strike prices of both call and put option trades exactly the same.

Pros and cons: The combined output will always remain in-the-money as long as that option trade remains in-the-money that has a profit return greater than the combined premiums of the two trades.

• Short straddle strategy: The fundamental principle of this strategy is the same as short strangle one. But the trader needs to be very careful in using this strategy.

Pros and cons: It is the most risky trading strategy of all mentioned strategies in this article. The degree of freedom for the price movement is very restricted beyond the option trade premiums.

These strategies are more viable if you are trading binary options with a FOREX currency pair as the underlying asset. The ideal currency pair will offer high resistance at both extremes, but will provide enough space in the middle for the price to reach the normal daily averages. A short strangle with strike prices just beyond the support and resistance levels can provide nice profit returns.

On the other hand, if the price is reaching a consolidated triangle with an impending breakout, a long strangle or straddle strategy will be more profitable. The strike prices should be adjusted according to what the triangle suggests about breakout direction.