Binary Options trading scheme: Strangle and Straddle

For example, there may be a Federal Reserve interest rate announcement, or a Non-Farm Payrolls news release. These news events often cause a large price move in the EURUSD forex pair (for example) but in this situation we usually don’t know which way it will push the price, or for how long.

Buying a high/low binary call and a put won’t work for this strategy. Your winning bet will pay out 70%-90% typically, but the losing bet will lose 100%. If you put $100 into each transaction, you end up losing money. Instead, you can use one-touch binary options for a strangle.

These types of options may have a payout above 100% because the price has to reach a distant pre-determined price point before expiry (and payout). Another advantage is that the price only has to reach the required level once before expiry to get paid; after that, it doesn’t matter what the price does until expiry.

You’ll need a broker that offers one-touch payouts over 100%. Some even offer up to 300% payouts. “It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.” – George Soros. Major news releases, which often cause large price moves, are shown in an economic calendar.

Assume you find binary options that pay-out 300% if a specific price level is hit before expiry. You buy a call and a put, putting $100 into each, for example. Here are the scenarios that play out:

• Large moves in both directions occur, touching both levels. Both options pay out for a total of $600, plus you receive your initial $200 back.
• A large move occurs in one direction, touching one of the option levels. That option pays out $300, while the other option loses $100. You profit $200, and receive $100 back on your winning bet.
• No large moves occur (or they are not large enough) and neither option level is touched. Both options lose, resulting in a $200 loss.

The higher the payout, typically the further the away the price will have to move to hit the predetermined price and trigger the payout. For example, to be paid out 300%, the EURUSD may have to move 100 pips within 15 minutes, for example.

Depending on volatility, this may be how far the pair typically moves in a whole day. Utilize this strategy when big news is expected: news that often causes big price moves.

Purchase options with an expiry after the news is released; this could be minutes or hours. Shorter-term options will typically have one-touch levels that are closer to the current price, but there is less time for the price to hit them. Longer-term options have more time to reach the one-touch levels (triggering a payout), but those levels will typically be further away.

There is always a trade-off. Look at historical volatility on the news event you are considering trading. See if the typical volatility is enough to trigger a payout based on the one-touch levels your binary options broker is offering. If it is, proceed. If the usual movement is not enough to trigger a payout on the options your broker has available now, then it’s best to skip the trade.

“I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.” — Warren Buffett. Remember that you can always still trade the news event using high/low binary options, on their own, without using a strangle strategy.

NADEX offers different options with different strike prices (the level where the option either pays out or doesn’t). Each option will trade at a different value depending on where the current market price is relative to the strike price. If a call option is about to expire and the current market is well above the strike price, the option will trade near 100.

If the current market price is well below the call’s strike price, the option will be trading near 0. The option will expire at 0 or 100; where you buy the option determines your profit or loss. This dynamic pricing allows for a binary options strangle strategy when volatility is expected to increase, such as when a major news announcement comes out.

Assume the EURUSD is trading at 1.0550. NADEX recommends selling an in the money (ITM) contract above 75 and buying an out of the money (OMT) contract below 25. For example, sell a “EURUSD > 1.05” contract near 80. This is ITM because the statement is true, the market price is currently above 1.05. Buy a “EURUSD > 1.06” contract at 20.

This is OTM because the statement is currently false, the market price is below 1.06. NADEX recommends setting take-profit levels on the options near 50. Here are the scenarios that could play out:

• The EURUSD price drops toward 1.05. Profit is taken at 50 on the sold option. Resulting in a $30 profit (80-50). Since the price didn’t move toward 1.06, the bought option results in a loss of $20. Net profit is $10, multiplied by how many contracts were purchased and sold.
• The EURUSD price rallies toward 1.06. Profit is taken on the bought option at 50, resulting in a profit of $30 (50-20). The price rose, so the sold option increased in value to 100, resulting in a loss of $20 (100-80). The net profit in this case is $10.
• The price whipsaws up and down, resulting in both options being closed at 50. This results in a $60 profit if you are trading one of each contract (50-20 and 80-50).
• The price doesn’t move much. The sold option expires at 100, resulting in a $20 loss (per contract). The bought option never moves into the money and expires at 0, resulting in a $20 loss. Your total loss would be $40.

This is a unique strategy limited to NADEX binary options. You should employ the strategy only when the market is expected to move significantly, at least to the strike price levels. Without enough movement, neither trade will be profitable. Maximize profits by taking trades when lots of movement is expected.

A strangle is the better play with binary options, mainly through the one-touch options, which means buying a call with a higher (one-touch) strike price and buying a put with a lower (one-touch) strike price. The strangle — two different strike prices — also works on NADEX binary options.

Doing a straddle on NADEX binary options isn’t a great choice because if you buy and sell an option with the same strike price, they will likely cancel each other out. For example, if you buy and sell an option with a strike price near the current market price of 1.0550, you will likely buy the option for 50 and sell an option for 50.

One will win and one will lose. You make $50 on one and lose $50 on the other. The strangle strategy provides more profit opportunities than the straddle in this case. That said, if you expect an increase in movement both up and down you could close your buy at 70 and sell at 30, resulting in net profit of $40 (70-50 and 50-30).

If the price moves only one direction, you make $20 on one option but lose $50 on the other. With binary options, the strangle option strategies discussed in the prior sections are a better strategy choice than a straddle.

What are the fees associated with the binary options strangle strategy?

Binary options don’t have fees outside the US, though the broker may charge you a portion of your bet if you close a trade before expiry. In the US, NADEX charges $1 per contract to exit a trade before expiration, and $1 per contract for contracts that expire in the money.

Can the strangle strategy be used with all binary options brokers?

The strangle strategy can be used on NADEX options. Outside the US,. the strangle strategy is best used with binary options brokers that offer one-touch options with payouts over 100%.

What can I lose on a binary options strangle strategy?

The strangle is profitable if there is large movement in the underlying asset. A strangle strategy could result in losses on both the call and put if there is not enough price movement to trigger a profit in at least one of the options/trades.

What’s the ideal expiry for a binary options strangle strategy trade?

Choose an options expiry that occurs after an important news event. The news event is what triggers the increase in volatility that the strangle is designed to capture.

Which one-touch binary options levels should I pick for my strangle trade?

The further away the one-touch strike price is, the higher the payout is likely to be. However, this means a lower likelihood that level will be reached. Take trades where the expected price move of a news event will likely push the price beyond one of the one-touch levels. If this occurs, so does a profit, assuming the payout for the win is over 100% of the bet size.

Final Thoughts

Trade binary options with a strangle strategy if your binary options broker provides payouts on one-touch options above 100%. If high price movement is expected, it is possible to net a profit if at least one of the one-touch levels is reached before expiry. Strangles are also possible with NADEX binary options.

The danger of the strategy is losing on both bets if the price doesn’t move. Therefore, only employ the strategy when a large price move is expected, such as the price moves following a high-impact news release like an interest rate announcement.

Practice these strategies before risking real money. It takes time to learn to trade effectively; for this strategy, this includes knowing when news events are occurring, knowing how much the news events typically cause the market to move, and then setting up a profitable trade scenario around that information. Also consider scalping options. See Scalping Options short-term strategies that utilize traditional options for big short-term gains.