ABBOS Expert Opinion about Strangle and Straddle strategies
In this article we are going to talk about two strategies which are based on the simultaneous purchase of two opposite options.
Strangle is one of the most functional strategies for binary options practiced by traders. This strategy is easy to understand and therefore it is very popular.
Strangle is based on the expectation of any changes in volatility. Trader buys call and put options with the same period of expiration, but with a different exercise value. This strategy forces the trader to wait for a sharp jump in price of a financial instrument that was preferred, downward or upward. It is not so important in what direction the price has moved, the main thing is its strong shift up or down.
For a successful start you will need to fulfill a number of the following operations:
|– Choose a financial instrument;
– To buy a call option out of money;
– To buy a put option also out of money (its exercise value must be different from that of the call option value).
Some brokers in the contemporary binary option market provide traders with the opportunity to buy at the same time both options mentioned above.
That is how Strangle strategy looks on the chart:
In Strangle profits can be obtained, granting one point. This strategy can bring income, if the volatility of preferred financial instrument significantly increases, i.e. the value of underlying asset significantly changes.
If the price does not change significantly over a certain time period, being at the same time between the exercise values of the options, the use of Strangle strategy will result in a loss, which amount is equal to the option premium on two options mentioned above.
Thus, the optimal solution is to use this strategy only in case when there is a long-term lack of volatility of the preferred financial instrument. Usually, after a long stagnation of the price there is an abrupt change. In addition, Strangle strategy could be applied to the financial instrument, which has a quite high volatility during the trading day.
Estimated losses and income in Strangle strategy are usually defined as follows:
– The maximum risk is a premium on purchased put and call options;
– The maximum profit is not restricted;
– The top mark of breakeven is the exercise value of call option together with maximum risk;
– The bottom mark of breakeven is the difference between exercise value of put option and maximum risk.
Advantages and disadvantages of the strategy:
– The profit can be obtained in spite of the direction the asset price will move;
– The risks are limited by the trader;
– The size of margin requirements is, as a rule, equal to the maximum possible risk;
– The only negative point is that making a profit is possible only with a significant change in the value of underlying asset.
Of course, we can’t forget about another strategy, which is called Straddle, as it is very similar to Strangle, with the only difference being that in Straddle both put and call are purchased at the same price, and thus are more expensive.
Here’s how Straddle looks on the chart:
The meaning of option purchase is the same as in case of Strangle – to get the profit in any case regardless of direction the price goes (upwards or downwards).
To exclude any negative factors using Strangle and Straddle strategy is possible if to prefer options on financial instruments with the highest liquidity. That is, their volatility should be the highest or it is expected to increase in prospect.
This is usually preceded over any important news that could affect the specific financial instrument. To predict this situation is possible if pre-analyze the impact of various news on the aforesaid financial instrument before.
It is important to focus on the data on price maximum and minimum over the past six months. This information allows you to specify a period of higher volatility and the direction in which the asset value will move.
That’s all for now. Got any questions? Just ask the expert!