The following sections cover the sold binary options straddle strategy. This is one of the more common binary option trading strategy types used by more aggressive traders who have access to a reputable binary options broker that permits naked selling of binary options.
Sold Binary Straddle Option Trading Strategy
The sold straddle binary option strategy involves selling both a binary call option and a binary put option, each with exactly the same strike price.
Usually the strike price of the straddle sold is set close to the present level of the underlying market or “At the Money”. As a result, the sold straddle strategy tends to be initially neutral on the underlying market.
In return for receiving an up front premium for selling the straddle, the trader will be obligated to pay out a fixed amount if the underlying market is better than the identical strike price of each of its component binary options at expiration.
Nevertheless, the short binary put and the short binary call options that comprise the sold straddle will not both pay out at the same time.
Why Traders Might Sell a Binary Options Straddle
Traders might use this initially neutral short straddle option trading strategy that involves selling both a binary put option and a binary call option if they thought that the underlying market would not move significantly by the binary options strategy’s expiration time, and they were not sure in what direction the market might end up trading.
Another justification for a sold binary straddle option trading strategy would be if the trader thought the market was going to range trade until expiration, but they preferred not to take the extra risk of placing stop loss orders in the market that could be adversely impacted by slippage.
This could be the case when they might be expecting particularly calm trading conditions in the underlying market, such as around holidays, without the market having a clear sense of direction.
Binary options traders might also consider selling a binary straddle if they think that implied volatility will fall and price swings in the underlying market will decrease.
Basically, holding a short binary straddle option trading strategy can give traders a limited risk way of benefiting from ranging markets, as well as the opportunity to profit from both down moves on the short call side of the sold binary options straddle or from up moves on the short put side.
Sold Binary Options Straddle Example
As an example, consider the situation of a forex binary options trader who thinks that the underlying market in EURUSD will decrease in volatility and that the market will probably not move substantially in either or both directions during the coming week.
For this trader, a sold binary straddle option trading strategy could make good sense. If the current spot forex rate for EURUSD is at 1.4000, this trader could sell a one week 1.4000 binary option straddle.
This strategy consists of a short EUR put/USD call binary option struck at 1.4000 and a short EUR call/USD put binary option struck at 1.4000 that each expire one week from initiation of the transaction.
The premium that the trader receives for selling the binary options straddle on EURUSD would be paid in advance and would usually be roughly twice what they would expect to receive for selling either an ATM EUR put or an ATM EUR call by itself.
Furthermore, since that profit is determined in advance, it then represents the maximum amount of trading gain that the trader will expect to receive from that binary options strategy.
Nevertheless, if the underlying market eventually deviates significantly from 1.4000 by the binary options straddle’s expiration, then the sold binary straddle option trading strategy will require the trader to make its fixed payout to the holder. The payout will result from the exercised EUR call side if the market is above 1.4000, but from the EUR put side if the market is below 1.4000.
Another trading strategy that can yield even more potential profit for the trader from the sold straddle binary options strategy involves legging out of the transaction before its expiration date as the underlying market ranges around the straddle’s strike price.
For example, if the underlying market moves up significantly from the straddle’s strike price, the trader can buy back the EUR put/USD call side of the straddle. Then, if the market subsequently moves down below the straddle’s strike price, the binary options trader can buy back the EUR call/USD put binary option.
This strategy may result in a higher net profit and potentially reduced risk than if the trader had simply held both binary options as short positions until expiration.