Binary Options Strangle Strategy
The strangle strategy is used by binary options traders to profit from price movements, regardless of the direction. While this strategy is more commonly associated with classic options, there are also a few ways to profit from the strangle in binary trades. This tutorial will review these tactics, with a definition of how the binary options strangle strategy works alongside examples and tips.
What Is The Strangle Strategy?
The strangle strategy is a method used by traders who anticipate a dramatic price movement and seek to profit from it but are not confident about which direction it will go. For example, if a major company announcement is about to be released, and the trader has no insight into what to expect besides a sharp shift up or down, they might employ a binary options strangle strategy.
In simple terms, this means placing two bets on price movements in opposing directions. This can work well with classic options since they grant the trader the right but not the responsibility to buy an asset at a specified price.
This means that if, say, your call option ends out of the money, you only stand to lose the price of the contract. And, if you have also taken out a put option and there is significant price movement in that direction, your profits should more than cover your losses in the other trade and you will end up in profit. This is a basic strangle trade.
But binary options are a little different since the payout is always predetermined and almost always lower than the price of the contract. If you simply open two opposing binary options contracts at the same time, you are often guaranteed to lose money. So, how does the binary options strangle work?
The Binary Options Strangle Strategy Explained
There are several ways that a binary options trader can make use of the strangle strategy. The first involves using non-standard binary options contracts such as one-touch, which have a higher payout than the classic high/low. Another way of working the strangle involves buying in-the-money and out-of-the-money contracts available from some brokers at the same time and at a price that allows you to profit regardless of which way the market moves.
A strangle is often impossible to achieve with the standard high/low binary contracts, since the payout is almost always lower than the stake. In other words, if you buy one put and one call option, you are guaranteed to win one of them, but it is also a certainty that your loss from the other contract will outweigh your profit.
But that doesn’t mean the strangle is out of reach for binary options traders. One adaptation that brings a similar strategy to the binary options game involves using one-touch contracts, which require the price to reach a specified level to pay out.
A one-touch binary option is more difficult to gauge than a simple up/down prediction, so naturally the payouts are higher. For the strangle strategy to work, you will need two one-touch contracts with payouts above 100%, and high enough to also cover any other fees associated with trading.
To execute the strategy, simultaneously open two one-touch binary options on the same asset with the same stake and expiry. One of the contracts will have a strike price above the entry price, and one below. This way, if there is a considerable market movement in either direction, one of your contracts is bound to win and you will make a net profit despite losing the other.
For example, imagine the Fed is due for an important meeting at midday tomorrow and the markets are anxiously awaiting their rates decision. This is a crunch period economically and you expect that a large hike will crash the markets, but the opposite would leave them buoyant.
Trading with binary options brokers that allow trades on indices, you could open a straddle trade by buying both a long one-touch binary options contract on the S&P 500 with a strike price of 3,850 and a short contract with a strike price of 3,650, against a current market price of 3,750. You stake $200 on each contract, and each strangle trade has a payout of 150%:
- If the S&P 500 hits either 3,850 or 3,650 before expiry, you will earn 150% of $200, or $300, minus your lost $200 stake in the opposing contract, netting you a total payout of $100.
- If there are serious market fluctuations and the price reaches both 3,650 and 3,850, both options will pay out, for a total profit of $600.
- If the price remains in the channel between your two strike prices without touching them, you will lose your entire $400 stake.
As you can see in this example, a drawback of the binary options strangle strategy is that brokers will usually require quite a significant price movement for you to earn a payout percentage that makes the trade profitable. As a result, there is a risk that neither contract will end in-the-money if the price remains steady.
Traders should therefore aim to use the binary options strangle strategy online when they can be reasonably sure a significant price movement is coming.
Nadex Strangle Strategy
Nadex and some other binary options brokers follow a system that is similar to high/low binary options in which a trader will sell an in-the-money binary to take a short position, or buy an out-of-the-money binary to assume a long position.
In the Nadex strangle, the trader must sell an in-the-money contract — meaning, one that is set to pay out at the asset’s current price — and buy an out-of-the-money contract at the same time.
The idea is to sell high and buy low, with Nadex stating that traders should aim to sell for at least $75 and buy for $25 or less. Thus, if the asset’s price rises, it will take your out-of-the-money contract toward the in-the-money level, and if it falls, it will carry your in-the-money contract toward the out-of-the-money level – in other words, toward profit in each case.
Like the one-touch strategy described above, this is a situational strategy that involves playing both sides of the market, and it requires a significant price movement to profit. If the price remains more or less stable, neither contract will become profitable and you will lose your stake from both.
Binary Options Strangle Vs Straddle
The straddle and strangle binary options strategies both aim to profit by setting up opposing positions at the same time on the same asset.
In classic options, the main difference between the straddle and strangle is that in the former, the trader sets up a trade with no bias toward a price movement in either direction, whereas in the latter, the trader is still betting the price will move in a certain way and using the opposing trade as a hedge.
However, binary options strangle strategies do not allow for bias either way, so in theory there is no real difference.
How To Earn Money With A Binary Options Strangle Strategy
The binary options strangle strategy is not as easy as opening two opposing positions in a trade — this is a strategy that will only work in certain situations, and moreover, you will need a suitable broker, tools and indicators if you want to execute it profitably.
There are several factors to take into account when you begin planning your binary options strangle:
The Right Situation
The binary options strangle strategy will not bring you any consistent success unless you time your trades to coincide with significant price movements. This is because you will need a binary contract with a high payout from your winning contract to cover your losses in the losing one. Brokers tend to require a fairly large price movement for this type of contract, meaning that you will risk losing your stake in both contracts if the price remains steady.
To counter this, traders generally time their binary options strangles so that they will be in effect after a major announcement or news event. A significant central bank announcement on rates, a company’s annual report, or a crucial government budget could all be good opportunities for this type of trade.
The Right Broker
You will need to ensure you know a few brokers that offer the type of binary options contract you will use in a strangle strategy. That will usually be a one-touch contract or, to a lesser extent, a ladder.
Before choosing the online broker, you should make sure that they also offer the asset you plan to trade, and that their pricing structure is suitable to profit from a strangle trade.
Some brokers offer one-touch contracts with payouts of up to 300%, but bear in mind that the higher payouts will generally also require a larger price movement, so you will need to balance the risk. At the same time, some brokers may have hidden costs such as withdrawal charges or account maintenance fees, and these can eat away at or even nullify your profit. Finally, always properly vet any broker and ensure it is trustworthy before signing up. We have collated a list of the top binary options brokers in 2023.
Knowledge is power in the trading world, so ensure that you research upcoming news events as well as relevant information on technical analysis and signals that can be used with the binary options strangle strategy. TradingView is a good place to explore tools, strategies and tips.
Books, PDFs, and online trading courses are also useful for brushing up on your technical knowledge, but online communities on Reddit and elsewhere can also help you learn new tactics for your binary trades while staying abreast of emerging developments.
The binary options strangle strategy is not the simplest to pull off since it requires multiple trades to be executed at the same time with a suitable expiry time to catch the expected price movement. It would be wise to practice setting up this type of trade using a binary options demo account until you get the hang of it.
Final Word On The Binary Options Strangle Strategy
Successful use of the binary options strangle requires careful timing from the trader and a significant price movement from the market, but if things turn in your favor, it can be a profitable strategy that limits your risk. Binary options traders must ensure they are working with a trustworthy broker that provides everything they need to make a strangle trade work. They should also ensure they know when to execute a strangle trade, since there’s a good chance they will lose money on both contracts if the price remains stable. Nevertheless, the strangle strategy is a powerful weapon in a binary options trader’s arsenal under the right circumstances.
Use our summary to get started. And check out our list of the best brokers for trading the binary options strangle strategy.
How Does The Binary Options Strangle Strategy Work?
The strangle strategy is a method used by binary options traders who wish to profit from large price movements regardless of the direction. To execute a strangle trade, the trader must open both a put and a call option on the same asset at the same time, and ensure that the payout is profitable enough that it will cover the loss of one of the contracts.
Which Binary Options Assets Work With A Strangle Strategy?
The strangle strategy is situational, so it should work on a range of different assets if the circumstances are right. It may suit stocks or ETFs if an important market announcement or news event is expected, forex if a central bank’s rates decision is in the offing, or bitcoin and other cryptocurrencies if an announcement on regulation is expected.
Can Beginners Use The Binary Options Strangle Strategy?
While the strangle is not the most complicated binary options strategy going, it would probably not suit absolute beginners. This is a strategy that requires familiarity with your trading platform and broker, but also the ability to judge the scale of upcoming price movements, if not their direction. New binary options traders can add the strangle to their list of things to try out on demo accounts, and ensure they’ve got the method down well before moving up to try it out with real cash.
Is The Binary Options Strangle The Same As The Straddle Strategy?
In classic options trading, the straddle and strangle are two similar strategies that work in slightly different ways. With the strangle a trader places a primary bet on a price movement and covers it with an opposing position, but with a straddle, the trader places no bias on either direction in their trade. When it comes to binary options, this difference is less important due to the payout and other terms in this trading product.
Can Both Contracts Pay Out In A Binary Options Strangle?
It is possible, though quite unlikely, for both contracts to pay out if you execute a strangle trade with one-touch binary options and the market exhibits a period of heavy fluctuation. If this is the case, you should get a good payout from both your short and long positions.