The Straddle is a strategy used in regular trading, and indeed — with a few tweaks here and there — it can be applied for binary options too. Before we get into its details though, we need to set a few things straight about it. It is a very situational strategy, only applicable under highly volatile market conditions. Under the right circumstances, it can in fact double the profits of the investor, but its primary goal is to counter losses.
The Straddle bears an uncanny resemblance to Hedging, another damage-control oriented strategy, but there are a few key differences between the two. Hedging is about the placing of two trades in different directions, at the same time or timed closely together. He essentially guarantees that he will lose one of his trades and win the other one. With the above in mind, it is quite revolting that there are still articles out there, which insist that Hedging is in fact Straddling.
In order to make the above described damage control method viable for binary options , we need to tweak some variables of the equation. Whenever it dips below 30, we have an oversold situation on our hands.
The RSI indicates an oversold asset after a sustained downtrend. This means a reversal is in the books. We place a Call trade here, with a minute expiry. Things speed up afterwards, and due to the high market volatility, the uptrend explodes, reaching a possible peak quickly and threatening with another drop before our Call option expires.
This is when we decide to Straddle: This way, we have put a safety in place against a price drop, and we have given ourselves the chance to possibly double up on the profits. In case either trade wins, we will have mitigated our losses. If the timing on the expiries is right, in the narrow band between the two strike prices, we may end up with both trades in the money. Expiry-timing is very important here, because it may mean the difference between winning both trades and losing them both.
Under very swingy situations though, it may make sense to place two such Touch trades in opposing directions. The massive potential return makes the approach viable. With this setup, the trader is betting on whether or not the asset-price will leave a set range a band on the chart. The returns on this option are good, but like the Touch solution above, it should only be used with truly massive price-swings. Yet another way to Straddle is through the Boundary option. More binary options strategy reading.More...