Binary Options Strangle Strategy
The strangle system can help minimise risk when trading binary options in markets with high volatility. The binary options strangle strategy can essentially be used to make money regardless of the way the market moves, as long as there is significant price movement. This beginner-friendly guide will explain how the binary options strangle strategy works, along with definitions and tips for setting it up.
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How Strangle Options Work
The “strangle” is a fairly common strategy in standard options contracts, but it can also be used to make profitable trades under certain circumstances in binary options. The basic strangle involves a trader simultaneously opening two opposing positions on the same underlying asset when they expect there to be a significant price movement. When a strangle is set up properly, the trader will profit whether the price rises or falls, as long as the price movement is sufficiently large.
In classic options, the strangle and straddle systems work because the payout increases with the extent of the price movement, whereas losses are limited to the price of the contract. So, as long as the price moves enough to outweigh the cost of the contract, the trader should make a net profit.
Binary options work slightly differently, since the payout is almost always lower than the price of a standard high/low contract. In this case, a non-standard binary option such as a one-touch contract can be used instead, since the payouts with these can be over 100% of the stake. In this type of contract, the “one-touch” refers to the strike price, which will be either above or below the current market price.
For a one-touch contract to pay out, the asset’s price must simply reach the strike price before the contract expires. The further from the current price the strike price is, the larger the payout will be.
A binary options strangle using this method would work like this:
- The trader opens a long one-touch contract with a payout of 150%.
- The trader stakes the same amount of money on a short one-touch contract on the same asset, also with a payout of 150% and the same expiry time.
There are three possible outcomes from this type of contract:
- The price rises or falls significantly, reaching the strike price on either the long or the short contract. In this case, the trader makes 150% profit from the successful contract, and loses 100% of their stake from the unsuccessful contract, leaving them with a net 50% profit.
- The price fluctuates wildly, reaching the strike price on both contracts. In this case, the trader earns 150% profit on each contract.
- The price remains relatively stable, and does not touch either strike price. In this case, the trader loses the entirety of their stakes and makes no profit.
The binary options strangle strategy can be an effective way to minimise risk when you are anticipating significant price movements based on upcoming news events, for example, which are notoriously difficult to gauge. The binary options strangle strategy means you don’t have to bet on which way the market will move – as long as there is sufficient movement, you can earn money.
Let’s look at an example to see the type of situation the binary options strangle strategy could work in practice.
Imagine that Apple’s numbers report is due out shortly and, because of the nervous, jittery mood you’ve detected in the market, you are expecting a significant price movement whether the figures are positive or not.
To capitalise on the expected price movement, you could try the binary options strangle strategy.
With Apple’s stock price hovering around 150, you take out two £100 one-touch binary contracts which both expire 30 minutes after the report is released. Both have the same payout of 150%, and your long contract has a strike price of 160 while your short has a strike price of 140.
- Scenario 1: The numbers are good, and Apple’s price skyrockets past 160. You earn £150 from your long position and lose your £100 stake from the short, earning you a net £50 profit.
- Scenario 2: The report is disappointing and Apple’s stock plummets. In a reverse of scenario 1, your short contract pays out and your long loses, earning a £50 net profit.
- Scenario 3: The report leads to significant market fluctuations, and the price jumps past 160 before falling to 140. Both contracts pay out, and you earn £300 net.
- Scenario 4: The market does not react strongly to the report and Apple’s price continues to hover around 150. You lose your £200 total stake.
As you can see, the price movement needs to be significant for the trader to make money, because if it remains within the range between the two strike prices, neither contract will pay out. But if there is a significant price movement in either direction, the trader can make a profit.
Benefits Of The Binary Options Strangle Strategy
Profit Both Ways
The biggest benefit of using the binary options strangle strategy is that you don’t need to choose a market movement direction to make a profit. As long as you place your trade during a time of high market volatility, and the market moves sharply in one direction, you can profit.
With this strategy, you cannot lose more than you place into the trade in the first place. This means that you aren’t going to face unpredictable losses that are possible with other instruments available in the UK, such as CFDs.
Built-In Risk Management
The binary options strangle strategy in itself already mitigates risk, so there is less need to implement other risk management strategies. When you enter into your two binary contracts, you already know exactly what you can lose and what you can gain, as well as the exact time it will expire.
Drawbacks Of The Binary Options Strangle Strategy
Requires High Volatility
Although it doesn’t matter which way the market swings when using the binary options strangle strategy, it does require a large price swing in order to be profitable. This means that you need to be certain an event is actually going to have a big impact on market movements, which can be done by educating yourself on news trading and market movements.
Reduces Potential Profit
Since most of the time only one leg of your binary options strangle trade will pay out, you will lose the stake from the other contract and this reduces your total net profit. Though there is the chance that both contracts will pay out, this would be unusual, and you need to also consider the risk that you will lose on each contract.
Setting It Up
For this strategy to work, the trader will need to be familiar with their binary options broker’s payout structure, but they will also need to know how to time the trade right.
Brokers set the payout of a binary options contract by calculating the probability that it will end in the money. With a one-touch binary option, a larger price movement in a contract with a shorter expiry time has longer odds, and will thus have a higher payout.
The most important thing to know when setting up your binary options strangle strategy is that the trade needs to be placed at the right time. The system will only work if there is a significant price swing, so you need to plan your contract’s expiry time to cover the expected price shift. If you don’t place the trade at the right time, and the price remains stable, you will not make any profit and will lose your premium.
Plan your trade around major news, for example, that you know is going to affect the market to ensure this doesn’t happen.
We recommend trying the strangle strategy with a binary options demo account before trying it with real funds. Once you get used to the technique, analysis, and variables, then you can use your own funds.
Comparing Binary Options Brokers For The Strangle Strategy
Choosing a binary options broker for the strangle strategy is about more than simply selecting a popular broker with a good platform, they also need to offer the contract variations that are required for the strategy to work. For the most part, one-touch binary contracts will be the ones to use, but ladders may also work.
It’s important to choose a broker that offers in-depth and accurate market data for your binary options strangle strategy. Data on how the market is going to move as a result of such events is an integral part of making successful binary options trades with the strangle strategy.
Know the underlying asset that you want to trade before you open your account, and ensure that the broker provides binary options contracts with a good payout for this asset.
Note, popular assets like major forex pairs tend to have higher payouts vs volatile cryptocurrencies, for example.
Some binary options brokers charge fees for withdrawals or other aspects of trading that aren’t immediately apparent when you open an account. Such fees detract from the profits that you make and you should do your best to keep them as low as possible.
Fortunately, the top binary options brokers provide a transparent pricing schedule before you sign up.
Bottom Line On The Binary Options Strangle Strategy
The binary options strangle strategy is a great way to up your chances of profit if you’re expecting a large price movement, even if you are not sure which direction the shift might go. However, you should be confident that a large swing is coming as you will lose your entire premium and gain nothing if it doesn’t move enough. Traders should ensure that they choose quality brokers with the binary variations they need and that they practice the strategy in a demo account before trading.
Can You Lose A Binary Options Strangle Trade?
Yes, if the market doesn’t reach either of your strike prices, then you have lost your trade. The maximum amount of money you can lose on a strangle is the price of the premium you paid.
Can You Win Both Contracts In A Binary Options Strangle Strategy?
Traders can win both the call and put option contract when using the strangle strategy. This is possible if the market price moves to each of the two strike prices before the contracts expire. However, this is uncommon.
Is The Binary Options Strangle Strategy Safe?
If you are an experienced trader then the strangle strategy is a great way to minimise risk in binary options trading. However, if you aren’t experienced enough to know when heavy market fluctuation is incoming, it can result in big losses.
How Do I Implement The Strangle Strategy In Binary Options?
By setting up a call and put option on the same asset with the same expiration time, you can benefit from the market moving in either direction as long as it surpasses the strike prices of your two contracts. One-touch binary options and ladders can be used.