Straddle strategy is a reversal method where the trader enters into the market when the current price is moving at the opposite direction. The straddle strategy in binary options trading is different than the strategy used in forex trading. You can use this strategy for any tradable asset in the binary options trading platform. Both require you to place call and put trade at the same time but you will notice differences in the implementation of the strategy.
How Straddle Strategy Work
You will have to place both the call and put options at the same price level and expiry time. Purchasing the call and put at the same allows the trader to make profits no matter if the asset’s price is moving upwards or downwards.
Straddle strategy is used when the asset’s price is fluctuating and the trader is not certain about the price movement. A steadily volatile market is a market with price values that constantly move up and down. It is not as effective when coming to a market with stable price movement.
If there is a large movement in either direction, the profit that the trader win on one option will be enough to cover the cost of other option. When you observe an increase in the price, you should place the put option. On the other hand, if you notice that there is a decrease in the price, you must place the call option. The expiry time that you choose must end at about the same time in between the high and low points when the trend is moving in the same direction.
RSI and Straddle Strategy
You will need to rely on the RSI to measure the strength and weakness of the price. Using the RSI indicator allows you to place several trades after a strong movement in the price that move the price higher or lower. A RSI value that is higher than 70 means that it is time for placing short term trades while a RSI value below 30 means that you should be placing long term trades.
Application of Straddle Strategy
It isn’t easy for a trader to apply the straddle strategy on the high/low option because of the fixed winning percentage. The winning percentage is not influenced by how big the price movement is. Therefore, it is impossible to make a profit if you use the strategy on high/low options. But, the straddle strategy works for touch and boundary option. In touch option, you get to profit up to 500% if you make the correct prediction.
Straddle strategy is best applied on the boundary option that has a lower and upper boundary. You can use the straddle strategy to make a prediction on whether the asset’s price will leave the boundary. For the boundary option, there is no need to place a trade in both directions. Not all brokers offer boundary options so you must make sure your broker offers this type of option.
Types of Straddle Strategies
There are 2 main types of straddle strategies that can be used in binary options trading. The long straddle strategy is used when there is a big difference in between the strike price and market price. This strategy is suitable when the trader is purchasing an asset and placing both call and put. Long straddle strategy is profitable because you will profit regardless of the direction of the market.
The short straddle strategy is applied when there is not much movement in the market and the assets’ prices do not reflect any significant changes. The short straddle strategy is suitable for a trader who is selling his assets in both the call and put options.
The profits will depend on the invest amount while the loss will depend how much has the price varied. You can also use the short straddle strategy when there is a parallel price movement and there are not much changes in the asset’s values. Parallel price movement usually occur at a time when the investors are monitoring the market for an important news.
In conclusion, the straddle strategy is a great strategy that can help you to get maximum reward and minimal risks. The straddle strategy can minimize losses because you will still have one option that end in the money even if the trend did not end in between the high and low points.