Easy now, no, read the title again, we’re not suggesting you find a dummy and mount them! This article is about straddling and it is FOR dummies (so if you’re reading this then namely YOU). Now if on the other hand you were actually looking for a tutorial on straddling dummies then a) you have come to the wrong place, and b) what the hell is wrong with you dude?
Okay now that we have cleared this up what is straddling? Well, as you already know to straddle is to sit on something with your legs either side of it. How does this relate to the trading of binary options? Well you know that binary options only have two possible positions a trader can take, right? Up (CALL) or down (PUT). Good. Well to straddle when trading is to take up both positions. So the placement of both CALL and PUT options at the right time is to straddle that particular trade. Before we begin, straddling should not be confused with hedging, which is also a strategy that calls for the placement of two opposing options. This article will help you understand what a straddle strategy constitutes and how it is different from a hedging strategy.
Okay so an example is probably the best way to go about this. Say you’re trading EUR/USD. The Euro looks like it is in the midst if an uptrend against the dollar. You wait to make sure the trend continues and then you place a CALL option forecasting that within the next ten minutes the Euro will continue to rise against the US dollar. Everything starts to work out exactly as you predicted (you trading fool you). But look! You foresaw what was to take place but only too accurately. The Euro is now shooting up against the dollar like it’s trying to shake itself free of it. If this rise continues then it will be hitting resistance levels way before the expiry of your trade. Does this happen? Yes! It does, so with six minutes still left on your trade the market starts to sell Euros and it begins to bounce back down. At this rate it will have dipped to below your entry point well before the trade expires. Stressful huh? Okay well calm down, and pay close attention.
At the very top of the peak, or as it begins to reverse (you can use the resistance level as a guide) you place your second trade, a PUT option. So now you have basically placed a CALL at the bottom of the EUR/USD trend, and a PUT at the top of it. So what happens I head you ask. Well, in this instance the EUR does drop, but not as steeply as it did when it touched its resistance levels. It drops to half way between the two options you have purchased. Meaning? Come on… Yep that’s right, meaning BOTH of your straddle trades ended up in the money. Awesome huh? That, in a nutshell is the straddle strategy. You CALL at the bottom and PUT at the top and hope for the best. Bear in mind that it won’t always play out in this way, you can end up with two out of the money trades if you’re not careful. Anyway, there you are, the straddle. Not to be confused with the hedge, which we will discuss in a different article. Now as far as straddling a hedge is concerned… Do not do this, unless you want a twig up your bum.