A binary options trading strategy based on the simultaneous purchase of call and put options with different expiration times is called Straddle option. This trading method is aimed to maximize profits from binary options trading in volatile periods. The best application for such a trading approach is for single shares and stock indices, although it could be suitable for trading on currency pairs and cryptos. The main condition for a volatile price action is a certain fundamental event. Usually, when corporate earnings reports are released, stock prices bounce up and down sharply, allowing traders to benefit from multi-directional trade. The same scenario is possible when the currency market is impressed by a macroeconomic report, shifting the traders’ sentiment. Geopolitical events and supply-demand issues have a powerful effect on commodities.
What is a straddle option?
Imagine a strong uptrend of Apple shares, for example. The general tendency and long-term chart analysis point to a reasonable continuation for the share value to grow. Thus, buying a call option with 24 hours expiry on the New York open is attractive. However, intraday charts might have sharp fluctuations of the price amid news or press-releases. During strong volatility, shares could decline for several hours in a row, reverse and go up in the previous direction. Therefore, binary options traders can buy put options with 30- or 60-minutes expiry if the technical analysis and price action is in favour of that scenario. This is exactly the Straddle option technique. As a result, profit from both directions can be multiplied.
Another example might be related to the price of oil. If the general trend is headed south as traders buy put options on the back of oversupply, buying put options on a long-term basis is more attractive. However, if an inventories report points to higher demand and consumption, the price of oil could be vulnerable to short-term upside swings. Thus, buying a call option right at the time of the report release could lead to additional intraday profits, while the initial deal will be in the money as well.
The main question is to determine when the volatility is rising as the system would not work properly in choppy trading conditions. There are several technical analysis tools measuring volatility. The main formula describing sharp whipsaws of the quote is based on Standard Deviation. It is also represented by StDev indicator. Another option to monitor volatility is to check out the trading volume or add Bollinger Bands indicator to the price chart. When the top and bottom lines spread then the volatility spike is in play. For stock indices, there is a Volatility Index (VIX) used in S&P 500, NASDAQ 100 and Dow Jones Industrial Average.
Japanese candlestick patterns are also useful in terms of identifying strong resistance or support levels. Long shadows of hourly candlesticks point to volatile price action as well. The scenario suggests a more fierce battle between the bulls and bears. Long shadows and whipsaws usually appear at around strong technical resistance and support levels, which can be used in the technical analysis to find intraday counter-trend positions. The main requirement for such entries is that the test of the threshold should be the first one as the pullback is very likely in that case.
Pivot points, intraday technical handles and Fibonacci Retracement levels are also important for the technical analysis. Imagine an uptrend which lifts prices sustainably and gradually, according to the long-term analysis. So, having the initial call option in the portfolio does not exclude a chance to buy a put option on the first test of such a resistance. The rate tests the threshold bounces back down and breaches it with the second or third attempt. The Long Straddle Option multiples the profit.
Types of straddles
Depending on the direction of initial entry and long-term trend, there are bullish and bearish types of straddle options. Actually, they are determined by the long-term option. If a trader bought a 24-hours call option and had several profitable deals of put options with 30-minutes expiry, this type of trading is called long or bullish straddle. In the opposite, buying a put option with a longer expiration and call options with a shorter period would mean a short or bearish straddle.
Based on the type of analysis, options straddle can be divided into technical and fundamental. In the first case, binary options traders count on technical indicators and other tools to determine the trend’s direction on a longer-term chart. Intraday trading signals are also provided by technicals in the way the previous section shows. Pivot points, trendlines, support and resistance levels matter here. It is always better to plan several scenarios for the trading session. Pivot points and important technical levels can be determined and calculated before the trading session, so traders can be ready for any outcome.
With the fundamental approach, traders rely on economic events, reports and press releases. The economic calendar is essential in this case, while traders should get ready to higher volatility during reports. Major events are properly marked, so planning plays a crucial role in profitable trading. For example, U.S. Non-Farm Payrolls reports are much more important for the dollar’s strength than Housing sector data. Thus, it’s worth expecting higher volatility on the day when it’s released and get ready to implement option straddle.
If you like this strategy, you might also be interested in this Demark Indicator Strategy - How It Works
How to use a straddle option in trading?
The main idea is to combine long-term and short-term analysis effectively. For daily and weekly charts, it is possible to use momentum and trend indicators such as MACD, Ichimoku Cloud and Average Directional Index. Most of them are effective in showing the trend’s direction and current momentum. So they will be suitable for the initial long-term option. However, most of them are quite weak in terms of catching small fluctuations, so they are less sensitive for the intraday analysis.
Volatility can be measured by envelope indicators such as Bollinger Bands, Keltner Channel or Standard Deviation. Faster and more sensitive tools include different types of oscillators such as Relative Strength Index, Williams %R, Stochastic and others. This type of indicators is powerful in terms of showing overbought and oversold conditions as well as reacting on small price fluctuations. Therefore, oscillators are effective for intraday counter-trend trading.
Straddle Option Example
The Straddle Option Strategy suggests several timeframes and shart setups for the same underlying asset. Call and put options are usually purchased simultaneously within the same trading period, but with different expiries. Thus, keeping the hand on the pulse of the market with different angles of view is important. Below are several examples of how binary options traders can maximise profits using straddles.
Bear Straddle on Litecoin
The daily chart below shows that LTC/USD had ended the bullish retracement on September 18 when the exchange rate struggled to get into Ichimoku cloud. Williams Fractal Indicator confirmed the bearish momentum as the trading signal appeared two days later. The daily close price was below the Ichimoku Conversion Line, which acted as support previously. Therefore, a trader decided to buy put options with 24-hours expiration. However, he suggested that a bullish bounce is possible at around the blue horizontal line, which represented the previous low charted on August 29. So a straddle was planned for the intraday trading on a first test of the blue support.
The hourly chart below confirmed the preliminary trading plan. After hitting the support level, 15-minutes candlestick charted a long downside shadow, pointing to large volatility. Two call options with 15-minutes expiry multiplied the general profit.
Long Straddle on British Pound versus the U.S. dollar
The British Pound was in the bullish phase in mid-October 2019 amid positive Brexit news. According to the daily chart below, Ichimoku Cloud was in favour of the bullish continuation on October 17 as the leading span was positive, all the lines were in the right order to proceed with the uptrend and the exchange rate was above support curves. A trader decided to buy call options with 24-hours expiration. However, he assumed that there might be high volatility at around the round-figure psychological resistance level of 1.3000 dollars per pound. The Standard Deviation Indicator confirmed the rising volatility.
Intraday price action was in line with the scenario. GBP/USD charted a long upper shadow on the hourly candlestick several pips before the resistance. 60-minutes put options were bought at the next bar open as Stochastic RSI confirmed the reversal with the bearish crossover. Thus, the straddle method played out.