Strangle and Straddle Option Strategies: Tricky but Playful

In every trading you need to think about the strategies and facts that would help you achieve success. When you are trading options, things can get complicated. You could be speculating on a few different things, such as your belief that the price at the end of the day will be above a certain level but not enough to justify a spot Forex trade, making binary options trade the more logical option in terms of returns. On the other hand, you might be speculating that the price will be going nowhere for a while. Most of the time, binary options are most useful trading instruments for drawing an “envelop” around the price, beyond which you do not expect the price to go. This can be an effective way to take some profit out of a stable or ranging market.

You can also use binary options to hedge trades, either alone or in combination with a spot Forex Trade. In order to implement these types of operations, you need to understand some option strategies. Inside option brings you the two most important of all the strategies are the strangle option strategy and the straddle option strategy.

Strangle Option Strategy

The Long Strangle: This is a strategy to use when you expect a directional movement of price, but not sure of the direction in which the move will go. In this case, you buy both call and put options, with different strike prices but with identical expiry times. Exactly which strike price you buy them at is something you can use to implement any expectations you have. For instance, if you expect a getaway with an increase in price it is more likely you can make the strike price of the call option relatively low and the strike price of the put option relatively high. The most you can lose is the combined price of two options but you can gain unlimited.

The Short Strangle: This strategy is used when you expect the price to remain flat within a particular range. It is exactly same as long strangle, except one thing that you sell both call and put options with identical expiries but differing strike prices. And the problem with this strategy is your losing trades are usually going to be much bigger than your winning trades. So, Inside option advices that it is more sensible to choose expiry prices that match the limits you expect the price to remain within at expiry from the current price.

Straddle Option Strategy

Everything in this strategy goes similar to strangle strategy. This too has long and short straddle strategy similar to above strategies but here the call and put options bought or sold should have identical strike prices, as well as expiry times. With the long straddle strategy, as long as the expiry price is far enough to ensure profit on one of the options that is larger than the combined profits of the options, the combined expiry will be in the money. Short straddle strategy is even more risky than the short strangle strategy as there is no extent for the price at all beyond the value of the option premiums.

So, how can a trader profit from these kinds of strategies? The most logical way would be to look for currency pair where there is strong resistance overhead and below, and enough space in between for the price to make a normal daily range. A short strangle with the striker prices just beyond the support and resistance levels could end with a nice profit.

On the contrary, if the price is coming to the point of a consolidating triangle where it has to break out, a long strangle or straddle could be suitable. If the triangle shows a breakout to one side, it is more likely that you can adjust the strike price accordingly to match that.

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