In recent years, binary options have rapidly gained popularity due to the benefits that are gained by applying various trading strategies. Straddle strategy is a trading process that involves buying both a call and put options for the same asset at the same strike price. It aims at securing maximum gain and minimum loss.
Binary options have become a favorite trading tool in the financial market. The trading of these options involves four vital aspects – an asset, a strike price, a time deadline and an appropriate speculation of market asset movement. In binary option trade you buy rights to sell or buy an underlying asset. The asset can be stocks, currencies or even commodities. The binary option trade assured the investor of 2 possible outcomes. If the investor has made a correct speculation then he is entitled to a fixed sum of money at the time of expiry of the time lines. If the investor has not speculated the market movement accurately, then he is entitled to lose his invested amount. If the option expires at a higher value than the strike price, then it has expired in the money. If the option expires at a lower value than the strike price, then it has expired out of the money.
Call binary options are they that yield compensations when the option has expired in the money. Put options are those that yield fixed earnings when the option expires out of the money. A trader endeavors to maximize his chances of being paid by making accurate guesses. However, a volatile market condition cannot confirm to any speculations accurately. At such time, investors apply various trading strategies for the options. One such trading strategy is the straddle strategy.
Straddle strategy in binary options is actually akin to straddling or having your leg across both sides of an object. This means, you must buy both a call and a put option for the same asset and for the same striking price. When the market is unpredictable, it can move either side of the strike price. A straddle will ensure that there is a payout for either which movement of the asset. Investors ensure maximum profits and minimal losses by trying this strategy.
Let us illustrate the straddle strategy in binary options with an example. Consider the Forex market and the asset is AUD/USD. Strike price is 93 cents and the expiry period is 1 month. The straddle is bought at 3 cents. Suppose the currency pair soars in value to 98 cents in the time period, then a profit of 5 cents is perceived. In addition to this the straddle premium of 3 cents is recovered and a net profit of 2 cents is made. Similarly if the currency pair falls down to 92 then the premium of 3 cents is not recovered. But the put option in the straddle yield a quick 15 to 20 per cent of returns keeping the losses to a minimum. You can also hedge the security if you perceive a sudden drop. This way your strike price can be narrowed closer to the actual asset value.
Binary options have become easy to trade in because of multiple trading systems and trading platforms. The prevalence of trading strategies has further made these options lucrative to investors. Investors are educating themselves on strategies and trading systems to take full advantage of the quick-returns mechanism of binary option trading.