It seems like every broker has their own names for what they call certain strategies for options. They try to make it complicated and I have heard traders are about, ” No it’s not a condor, it’s a butterfly.”(You will get to this topic in the next section. But basically there are several strategies that traders can employ and in this section, we will talk about something called a straddle.
Again, you may hear traders argue over the difference in a straddle and strangle but they are almost the same. Here is the true definition of a straddle…
A straddle is an options strategy in which the investor holds a position in both a call and put with the same strike price and expiration date, paying both premiums. This strategy allows the investor to make a profit regardless of whether the price of the security goes up or down, assuming the stock price changes somewhat significantly.
You can not do this in binary options, however and it would be pointless to do it. If you bought and sold a strike for 50 each, you would not make any money, no matter which way the market went so you have to choose 2 different strikes to perform a straddle.
This is a Straddle.
Depending on how far out you buy and sell each strike, you can calculate if your binary will make money or not if price closes beyond the threshold of just one of your strikes. They both can’t win but if only ONE of them does, you can make money.
First calculate the price that you want to spend for each leg of this straddle. Maybe you want to pay $55 for the top and $55 for the bottom. If you do this, you will not make any money because both of them together equals 110. This is 10 more that 100. Since all binaries are equal to 100, you have to buy a straddle that costs less that 100 total. For instance…
You can see that I can buy a straddle, 3 days out, and it will cost me:
$22.25 for the upper strike.
$25 for the lower strike. (75 minus 50 is 25)
$4 in commissions (roughly)
Total price = $51.50
Is this a good trade? One way to determine this is through probabilities. What is the probability that price will close outside of one of these areas? If your probability is 75% that it will close beyond ONE of these strikes, then you have a great opportunity for a trade. If you have a 50% probability that it will not close beyond one of these levels, then you may not have a good trade at all.
You can also take profits if you wish but this is a topic for another module. Just know that when the underlying price matches your strike price, the price for the binary should be around 50.
