The Long Strangle Binary Trading Strategy

long strangle strategyOne of the binary trading strategies which frequently adopted by binary traders when they are unsure of the direction which the financial markets will move when they are experiencing high volatility is the “Long Strangle” strategy. Let us assume that S&P 500 index is presently at 1000 points. Because of an upcoming news release, you expect a large move in the index of around 18 points. However, you are unsure which direction that the market will be heading in. It is in situations like this that the long strangle trading strategy is well suited for.

Entry of A Long Strangle (Buying Volatility) Strategy

The concept of a long strangle trade is simple. Since you are expected the index to move by 18 points, You purchase an option (call option) for the index to breach the 1018 level and simultaneously sold an option (put option) for the index to fall below the level of 982.

Transaction Outlay

Let’s assume that the trader purchased a 0 -100 binary option contract for the S&P 500 to breach the 1018 level $67.30 and sold a 0 -100 binary option contract for the S&P 500 to drop below the 982 level for $30.20. His total cost outlay for both trades entries will be $97.50.

Trade Exit

If upon expiration, the index reaches above 1018 points or falls below 982 points, then the trader will close in the money for one of the trading contract options. The trader is only above to profit for only one of the above mentioned contracts as the index cannot settle below the 982 level and 1018 level concurrently.

Profit Potential

Since the option contracts are for a sum of $100, this mean the payout for each of the above mentioned contract will pay out a sum of $100 if either one of them close in the money. The disparity in trade entry prices for the call and put options in the above scenario is because of the put options is seen as being further away from closing in the money hence the higher payout. It also meant that the transaction is a higher risk trade when compared to the call option trade.

Advantage and Disadvantage of Long Strangle Strategy

Because the trade transactions cover both legs of the possible price movements, the trader need not worry about the direction prices will go to. All the he need to be concerned about is the magnitude the price movement.

However due to the very fact that the trader needs to cover the two legs of the price movements, his transaction is also doubled. There is also a very real chance that the price movements might not touch both ends of the price spectrum and this could result in the trader losing all his investment.

It is should noted that this type of trades have always been higher in risk than other traditional types of binaries. So it is advised that only those who have the appetite for risks should ever consider trading such an advanced trading strategy.

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