- Strangle Strategy Basics
- The Strangle Strategy In Binary Options
- Setting Up A Binary Options Strangle
- How It Works
- Nadex Strangle
- Advantages Of The Binary Options Strangle
- Disadvantages Of The Binary Options Strangle
- Timing Tips
- Bottom Line On The Binary Options Strangle
- Can I Use A Binary Options Strangle Strategy With Bitcoin?
- Is The Binary Options Strangle Strategy Risky?
- Which Binary Options Contract Is Best For The Strategy Strategy?
The binary options strangle strategy allows traders to profit from volatile markets while providing a level of protection if the underlying asset does not move as expected.
This guide lays out the binary options strangle method for beginners, giving trading definitions and examples, pros and cons, and answering common questions. Find out how to set up a binary options strangle strategy.
Strangle Strategy Basics
With standard options, a strangle strategy involves:
- Purchasing a Call contract that is higher than the current market price
- Purchasing a Put contract that is lower than the current market price
Importantly, both contracts must be out-of-the-money when they are bought. Now, traders just need the market to move sharply enough so that either the Put or Call is in profit.
The system essentially allows investors to reduce risk by covering the uncapped losses associated with some options contracts. In addition, traders are now speculating on volatility rather than price direction.
The Strangle Strategy In Binary Options
Many standard options strategies do not translate over to binaries, but in some situations, the strangle strategy can be applied to binary options trading.
Due to the fixed payouts of standard high/low binary options contracts, placing two simultaneous long and short positions will almost always lose money.
If you have an 85% payout on your $100 stake, and you place one high and one low contract on an asset’s price movement, you can be sure that one of your contracts will pay out, but you are also going to lose $15 overall ($100 loss – $85 profit).
However, more exotic variants such as one-touch and ladder binary options can have payouts in excess of 100% of your original stake. And with a high enough payout, the strangle strategy can work with binaries.
Importantly, you will need to find a broker that offers the appropriate type of contract. You will also need to check if your binary options broker allows you to open two opposing one-touch options, for example.
Setting Up A Binary Options Strangle
To recap, the binary options strangle strategy involves placing two simultaneous bets on opposite price movements when you expect there will be significant market volatility.
With this in mind, a good time to use the binary options strangle system could be before a major news announcement. This could be a central bank’s decision on interest rates, the results of a political referendum, or an earnings report, for example.
Traders can then use one-touch contracts, which require an asset to reach/hit a certain price point before the expiry, since these can pay out more than 100% of the initial investment.
How It Works
Let’s say a stock is trading at $100, and you take out two touch contracts, each with a 150% payout. Your long contract requires the price to reach $105, and your short contract has a strike price of $95.
In this scenario, there are four possible outcomes:
- The price rises to $105 before expiry, earning a payout of $150. Subtracting the $100 stake on the losing contract leaves the trader with a net profit of $50.
- The price falls to $95 before expiry, also leaving the trader with a net profit of $50.
- The price bounces between $95 and $105 due to high volatility, hitting both levels, and the trader makes $300 in profit.
- The price remains stable, hitting neither strike price, and the trader loses $200.
As demonstrated in this example, the most important factors in binary options strangle strategies are the extent of the price movement and the payouts offered.
Bear in mind that the higher the payout, the more significant the price movement will normally need to be, and thus the higher your risk of earning nothing from this trading system.
To help you understand the binary options strangle strategy, here is another example of a potential setup.
Trader A is a keen crypto trader and believes that the value of Ripple (XRP) will experience heightened short-term volatility as an important ruling is expected in a relevant case with the SEC. The decision is being kept closely under wraps, but whichever way it goes, significant price movement could take place.
With this in mind, Trader A chooses to implement a strangle strategy, opening one-touch binary options contracts above and below XRP’s current price.
As XRP has been trading at around 0.353 per USDT (Tether), the trader opens:
- A long position with a strike price of 0.3575
- A short position with a strike price of 0.3485
The decision is expected before midday, so the trader opens 2-hour contracts at 10:30 am, each with a $500 stake and a payout of 125%.
In this example, the relevant court case goes against Ripple and hits news tickers just after 11:00 am. XRP’s price quickly falls, bottoming out at around 0.348.
As a result, the short position finishes in-the-money and the trader makes a 25% profit, or $125.
Some leading brokers, such as Nadex, use a slightly different binary options system ($0 – $100) that also lends itself to the strangle strategy.
Here, traders simultaneously sell an in-the-money binary and purchase an out-of-the-money binary. The objective is to sell high and buy low with traders aiming to sell at $75 and above and buy for $25 or less.
This means if the price of an underlying asset rises, it will bring your out-of-the-money option to in-the-money and vice versa, producing a profit in both scenarios.
Importantly, the premise and market conditions need to be the same – traders need volatility. If prices remain relatively stable then you will lose money.
Tip: Nadex offers a free demo account where users can test the strategy without depositing funds. The broker’s platform is also home to volatility indicators and beginner-friendly technical analysis tools.
Advantages Of The Binary Options Strangle
- Volatility speculation – The binary options strangle strategy is direction agnostic. Traders simply need sufficient volatility, making it popular in markets like cryptos.
- Simple – The binary options strangle strategy is relatively straightforward, meaning beginners can understand how it works and apply it on trading platforms.
- Fast-paced – Variable contract lengths as low as 30 seconds mean that binary options traders can make multiple trades throughout the trading day if market conditions are suitable.
Disadvantages Of The Binary Options Strangle
- Limited broker support – Due to the relative rarity of exotic binary options contract variants, the strangle strategy may not be available at all brokers.
- Payouts – The binary options strangle strategy only works if brokers offer suitable payouts to make opening both trades worthwhile. This will ultimately depend on the brokerage, underlying asset and market conditions at the time.
- No native indicator – Many binary options strategies rely on particular indicators or signals, however, there is no native indicator when using a strangle.
Market volatility and the degree of upcoming volatility can be difficult to read, even more so than price direction. As a result, the timing of trades is particularly important.
The periods during and after major economic events are often times with high volatility. Announcements such as new regional inflation data and employment numbers, geopolitical events and other global news can cause heightened volatility in markets as varied as commodities, stocks, indices, and forex.
Leading up to such events, the markets can experience lower volatility as investors hold their breath. As news breaks, betting on increased volatility rather than direction can be a solid choice.
In addition to global or regional news, company or sector news can heavily impact the price of stocks and commodities. Look out for announcements such as earnings reports, dividend adjustments and company layoffs for binary options strangle strategy opportunities.
Bottom Line On The Binary Options Strangle
This guide has highlighted the advantages of the binary options strangle strategy, including its simplicity and direction-neutral setup. However, the binary options strangle strategy will only work under the right circumstances, including sufficient payouts and suitable contract variations.
Head to our guide on binary options strategies for other trade setups.
Can I Use A Binary Options Strangle Strategy With Bitcoin?
Crypto markets are known for their high volatility. As a result, Bitcoin (BTC), Ethereum (ETH), Ripple (XRP) and other tokens lend themselves to the binary options strangle strategy. The challenge will be that binary brokers typically offer lower payouts on digital currencies.
Is The Binary Options Strangle Strategy Risky?
The binary options strangle strategy mitigates risks to some extent, since you are covered if there is a large price movement in either direction. However, if there is limited price movement, you also face the risk that neither contract will pay out and you lose your stake in each.
Which Binary Options Contract Is Best For The Strategy Strategy?
The most straightforward way to use a binary options strangle strategy is through two one-touch contracts. These allow traders to place two opposing bets on price movements simultaneously. However, other variants such as range/boundary options may also work. Nadex’s $0 to $100 binary options trading system can also be used with the strangle.