Binary Options is a relatively new form of online trading. However, while it might be new, the whole process is simple, meaning that almost anyone can trade in Binary Options, regardless of his/her experience in trading. The initial premise of Binary Options is that you put forth money towards an asset (which can be almost anything) and predict that it will close at a higher or lower process compared to when you begin. As long as the prediction comes true at the end of the expiration period, the trader is paid a premium. However, the risk associated with it is that in case the prediction does not come true, the trader loses the money.

Planning

After the initial description, most traders think of Binary options trading as being too reliant on luck. However, with the right planning and strategies in hand, it can be turned into a very good tool for profits. The only thing to remember is that it is not a one-shot mechanism. Just as you are not guaranteed profits in normal trading, Binary Options does not guarantee you will profit either. Moreover, it is important to keep in mind that having a proper mechanism for the profit significantly increases your chance at online trading as well.

Underlying Principle

Most Binary options trading strategies focus on the direction of the trade rather than on the actual price of the commodities. This is important because Binary options do not work with concrete numbers like normal stock trading. As long as you have a good idea of the direction of the prices for the stock, you are a winner. This is why it is not good to focus on one end of the spectrum if you want to make the profit. With that in mind, we will be discussing on the Straddle Strategy for Binary options trading since it is a completely neutral trading mechanism that offers the perfect chance to make some profits in a volatile market.

What is the Straddle Strategy?

Essentially, the Straddle Strategy, as the name implies, focuses on a trading pattern which forms a straddle, or a wedge, in the market. However, for it to work, the wedge has to form sufficiently fast: meaning that it is applicable to a volatile market only.

How does it work?

The idea is quite straightforward. You invest in both put (predicting that the stock price will fall) as well as call (predicting that the stock price will rise) for the same asset. The time frames for the 2 different options (call/put) can be different (same time period is not allowed for both at the same time). This is decided on the current market conditions. Mostly, the Straddle strategy is utilized in a short time frame (5-15 minutes) because volatile markets rarely last longer than that.

Why Volatile Markets?

You may ask why we need to utilize this strategy on volatile markets only. The reason is quite simple. We operate this on the premise that the price of the stock will either rise or fall in contrast to our investment price. As long as either occurs at the end of the expiration period, profits can be realized with a little foresight. However, what is the worst case scenario? You invest $10 each towards Put and Call of the same stock, and the prices remain stable throughout the period. This means that you lose not only the initial investment of one side but both simultaneously. However, in order to profit, you will have to invest a little more on the side that is expected to occur with a higher probability.

For example, as earlier, you invest $10+$10 towards a stock with an expiry of 5 minutes in a volatile market.

Let’s assume that the stock prices fall in contrast to your investment price.

Thus, while you lose $10 towards the Call option, you gain the amount invested towards the Put option.

Since the payout is usually significant ($10 yield around $18), you are left with $18 against your initial investment of $20. This is where prior market sense comes into play.

If you invest $20 towards Put, you gain $36 against the loss of $10, giving you a net profit of $26. In case you lose this, the loss is offset by the profit earned from the $10 Call, meaning that it is minimized to some extent.

Since you are not trading the exact same thing for the exact same period (Binary Options brokers do not allow this), you can vary the time period for the 2 options to gain on both. However, this requires a lot of experience on the part of the trader.

Common Formulae

Following are some of the formulae you would need in relation to the Straddle Strategy:

• Profit Achievable: Unlimited (depends on the investment)
• Total Profit: (Profit of the Underlying Stock ~ Loss from Put/Call) – Premium Paid
• Maximum Loss: Total Premium Paid + Total Investment
• Loss Scenario: Price of Investment = Expiration Price of Stock

The best part of Binary Options is that you can lose only in small amounts. This is a wide cry from online stock trading, where the starting point is a very big investment. However, here, the maximum that you can lose is your initial investment, which can be fully controlled.

Points to Remember

While the Straddle strategy is one of the most neutral strategies, it carries with itself a fair chance of loss as well. Keeping that in mind, always invest only as much as you can bear to lose. Moreover, it is important to keep an eye on the commission you are paying. While usual commissions are quite small, for a frequent trader, this can add up significantly for each trade conducted. This is especially important in a volatile market, where the trades are conducted on a changing basis. Thus, you may want to opt for a low commission broker, even at the expense of a few other facilities unless you want the charges eating into your profit margin. Last but not the least, you would still need information on the expected turn of the market to profit from this method, so be sure to follow the trends.

Modifications

There are 2 modified strategies in relation to the Straddle.

• Strip

If you expect the volatility in the market to display bearish trends (leaning more towards downward trends), you may want to opt for this. What it does is invest in twice the number of Puts compared to the number of Calls.

• Strap

The opposite is valid in a bullish market, where you invest twice the amount in Calls as you do in Puts.

Essentially, the 2 modified strategies work on a market which exhibits bias in either direction.

How to Become Successful?

Binary Options strategies may be easy to understand, but they are quite difficult to master. This is because while vague trends offer the chance at ease of operation, the absence of concrete values can often lead to over investment. While strategies like the Straddle try to limit this, at the end of the day, as a trader, it is up to you to decide on exactly how you wish to proceed. Research well into the markets, explore your options and understand your weakness. That is the only way to ensure that you have a good chance of success.

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