Trading Binary Options with a Straddle Strategy

One trading strategy popular with binary options traders is the straddle strategy. When a trader predicts a significant price movement will occur, but is not sure which direction, this method is very appropriate to do. This strategy, often referred to as a neutral option, is often mistaken for a hedging technique. In fact, the straddle strategy is more accurately said as a combination of the two types of reversal binary options methods.

As discussed in the previous article, the binary options reversal strategy can be divided into 2 parts, namely the reversal trend used to place options on trend reversals, and risk reversals that place two opposite trading positions simultaneously. In this case, straddle binary options observes the top and lowest points of a trend before placing 2 options with the same expiry time. More specifically, the "put" option is placed at the strike price at the peak of the trend, while the "call" option is positioned at the strike price at the bottom of the trend.

In using this strategy, traders are of course required to be able to analyze the location of support and resistance in previous price movements. The results of these observations are guidelines in determining the position of "put" and "call" options. The level of support and ressistance determined by a trader can be an imaginative range, which can give confidence in profit if the price position is within the range when the expiry time expires.

Because this strategy uses the highest and lowest points on a trend, finding these two levels can be the most difficult of the use of this strategy. If the determination is right, then trading will certainly end in-the-money because price movements can be predicted within the range range. However, incorrect estimates can cause prices to move out of range and cause one option to end out-of-the-money.

When is the right time for a Straddle Strategy?
Straddle binary options are best done when the market has stable volatility. That is, high volatility in the prices of certain instruments moves regularly, with the appearance of support and resistance levels in the same range. Thus, the actual price trend looks sideways even though market volatility is high. Trading in this period is strongly recommended if the two options you place are targeted to end in-the-money. If this method is done to anticipate losses, make sure if the expiry time you set is able to accommodate new trading positions. This method is done if you believe the previous trading position will fail, so the second trading position will be able to reverse the possibility of loss from the first option.

Suitability of straddle techniques for high volatility can be one of the solutions to trading binary options. In one of the tips for binary options trading, high volatility is a situation that is not recommended for binary options traders, especially for those who use a low expiry time limit. However, the unpredictable price movement conditions require traders to be able to adjust their trading methods to various market situations. To overcome this, in addition to extending expiry time limits, straddle strategies can also be applied so that traders can place options even though market volatility is high.

How to Straddle Binary Options
Because this strategy is initially done by determining support and resistance levels, the first thing that comes to your mind is probably the use of Fibonacci lines. This method is one of several ways that can be used to apply this strategy.

In addition to finding Fibonacci support and resistance limits, you can also determine the peak and base of a trend with "overbought" and "oversold" levels, which can be observed through the RSI indicator. Observation of these two levels can be used to determine the points of the "call" and "put" options. An example of using the straddle strategy with the RSI indicator can be seen from the image below:

Determination of the "overbought" point of the RSI is when the price crosses the 70 level, while the level 30 marks the "oversold" limit. In the picture above, trader A initially placed the "put" option for the GBP / USD pair, because the trading signals from the RSI indicator confirmed there was "overbought" when the price passed level 70. The selected expiry time was 20 minutes. But the reversal from the "overbought" position turned out to be very aggressive and the price slid down to near level 30 when expiry time was still 15 minutes left.

Moments before the expiry time runs out, GBP / USD breaks the level of 30, or reaches its oversold position and experiences a reversal trend. For fear that the option will end out-of-the-money when expiry time arrives, A then chooses an option "call" at the strike price that shows an "oversold" position, with an expiry time limit that ends up the same as the previous "call" option. Thus, A has indirectly determined the price range for the 20 minute period. If GBP / USD then reaches the estimated price range when expiry time arrives, then both option A will end in-the-money, and profits will also be multiplied. But if the price is outside the range, one option A will still end in-the-money.

The advantages of Straddle Binary Options
The straddle binary options strategy can provide various benefits for those of you who like to trade with high volatility, especially if you are still not sure whether prices will move up or down. Some of the advantages that can be obtained from using straddle binary options are:

1. Can trade binary options even though volatility is high. If previously binary options traders were advised to choose market conditions with low volatility, now traders can use the straddle strategy to trade binary options even though market volatility is high. What needs to be considered here is only the stability of the volatility, because if prices are very volatile but not stable, then the determination of the level of support and ressistance will be increasingly difficult to ascertain.

2. Keep profits wherever the market will move. Because the way to trade straddle binary options is done by placing the option "put" and "call" for the same expiry time, then the profit of the trader will be more assured when the price moves up or down.

3. Can increase profit opportunities and minimize risks. With an imaginative range of placement of "call" and "put" options at the point of support and ressistance, traders can increase the likelihood of profit and minimize trading risk. If when expiry time the price is within the range range, then profit can be achieved from both options, while the risk can still be minimized if the price exits the range, because one option will still end in-the-money.

4. Shorten the analysis time. Before opening a trading position, traders will usually focus their focus on analysis both technically and fundamentally. Not infrequently this activity is a major activity and is very time consuming. However, if a trader can place two options at the same time, then the trader can simply search for support and resistance levels. Traders also do not need to linger predicting the next price will go up or down, because the support and resistance positions can already be used to confirm the price range in the time span until expiry time arrives.

Important Things in Straddle Binary Options
Although straddle in binary options can provide a more promising profit, there are things that still need to be considered before you use this strategy.
  • Support and Ressistance levels

Determining support and ressistance levels is not an easy thing, especially if the line drawings can vary for each trader. If you are hesitant to use the Fibonacci line because of its subjectivity, there are still other ways that can be done such as using the RSI indicator or observing the formation of reversal trends.

  • Fakeout and Breakout

Fakeout and breakout are two things that can mess up your analysis if you can't anticipate it well. If you want both options to end in-the-money, then you must be aware of fakeout (where prices will move through the support or resistance limits, but actually don't) and anticipate a breakout (where prices actually break the support limit or ressistance).

One of the most effective ways to confirm these two things is to wait for the completion of the price pattern at the end of the time frame period you are using. For example, if you pay attention to the graph with a 15 minute time frame, then wait until the pattern formation is completed in one frame 15 minutes so that you are more sure if the price is experiencing a breakout or just a fakeout.

  • Modify Trading Size

Like the hedging and risk reversal binary options strategy, the size of a trade can determine the amount of profit to be received, if you can decide which option has a greater chance of occurrence. Actually, trading profits can already be increased with the same trading size. To prove it, let's look at an example of Si Ipin trading from the graph below:

On the USD / CHF chart above, Ipin opens an option "call" at the support level, and places "put" when the price has been confirmed not able to break the resistance level. Ipin's trading capital was originally $ 1000, with a return of 75%. Ipin then uses the same trading size to place the second option while waiting for the expiry time to arrive. From the movement of the chart above, it can be seen that the price is within the range of the Ipin trading range, so Ipin gets a payment of $ 3500, which is the result of additional profit and capital of Ipin.

Thus, the total profit of Ipin is $ 1500, or twice as much as the return of $ 750 received if Ipin does not place the option "put" on the level of resistance. If one of the Ipin options turns out to be out-of-the-money, Ipin will still get a profit of $ 750, because Ipin will only lose the initial capital of $ 1000 from the failed option position, while the in-the-money option will generate a payment of $ 1750.

From the results above, imagine if the trading size for the Ipin "call" option is greater. The profit achieved by Ipin will certainly increase. However, before increasing the amount of capital in one option, you must be absolutely sure if your choice is correct, because if it turns out the price moves in the opposite direction, the loss you receive will also be greater.

Read to How to use RSI for trading trends
Read to 7 ways to measure the success of your trading system

Broker facilities
Not all brokers allow their clients to place two options on one asset at the same time. Therefore, you have to dig deeper information about the binary options broker that you use. If your broker allows the use of this method, you can more freely practice this strategy. But if your broker forbids it, you can simply choose a longer expiry time to add a second option when the price moves against the estimate, so that both of your options can end at the same time.

One thing that cannot be forgotten in using the straddle binary options strategy is practicing on a demo account. Testing the implementation of the strategy can determine whether this method fits your trading style. If you are comfortable with this strategy on a demo account, there is no other reason not to use the straddle binary options strategy.