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  1. #1
    Administrator Martin Kay's Avatar

    Тhe Strangle Strategy for Binary Options - a whole new way to trade !!!

    Hi guys! We have a very interesting review by Bogdan G on the Strangle Strategy. He adapted it from the Vanilla Options to the field of Binary Options and prepare examples of its successful use in profitable trades. Check it out and share your opinion on it! Could this strategy be used as a part of the successful binary options trading?

    Originally posted by Bogdan G on bots.com school. Click here for the full review.

    How does a Strangle work? Binary Options


    Is this powerful strategy reserved just for Vanilla Options traders? I sure hope not as I really want it to work for Binaries also. Just when I was about to give up and conclude that the Strangle cannot be used for binary trading, it hit me: the answer must be Touch/No touch binary options. With Touch/No touch trading you bet that price will reach a certain level before expiry time. So to make the Strangle work, we will chose a Touch option for a higher level (strike price) than current price and another Touch option for a lower level than the current price.

    Wrapping it up

    Using a Strangle for Binary options trading might prove to be profitable, but there are still a lot of questions to be answered and I think the most important one is “How far away from the current price can I set my Touch Options?” If the broker just offers Touch Options that are very far away (800 – 1000 points) from current price, that will increase the possibility of both my trades to end up losing. To make the long story short, the success of the Strangle in the form we talked about is highly dependent on the conditions that a specific broker offers.

  2. #2
    M.J
    M.J is offline
    Veteran Member M.J's Avatar
    Nice review on strangle.

    It is correct that strangle is not some holy grail. You need to analyze market properly. If u r using it in high/low conditions then u will have to see if u r choosing near to correct high and low entry points. If u r using it in one-touch then u will have to check market volatility.

    I consider it very powerful strategy. By practicing on demo, one can understand it.

  3. #3
    Master Member Bogdan G's Avatar
    Indeed my friend, demo or paper trading for this strategy is a must. In fact, I would be curious to see some of our members' results with this strategy. it depends a lot on the conditions that the broker offers

  4. #4
    Legendry Member Michael Hodges's Avatar
    Quote Originally Posted by Bogdan G View Post
    Indeed my friend, demo or paper trading for this strategy is a must. In fact, I would be curious to see some of our members' results with this strategy. it depends a lot on the conditions that the broker offers
    This strategy needs some serious thought and practice before deployment. The one touch options are a nice return and a good way to trade binaries but I have found that the strike prices are so exagerated that it is not very likely that you will win the trade unless the markets make some wild movement. There is a reason the one touch options offer such a high rate of return, it is meant to lure unsuspecting traders into a trade that is not likely to produce the desired result, winning.

  5. #5
    Master Member vinayakm's Avatar

    !!!

    Quote Originally Posted by Michael Hodges View Post
    This strategy needs some serious thought and practice before deployment. The one touch options are a nice return and a good way to trade binaries but I have found that the strike prices are so exagerated that it is not very likely that you will win the trade unless the markets make some wild movement. There is a reason the one touch options offer such a high rate of return, it is meant to lure unsuspecting traders into a trade that is not likely to produce the desired result, winning.
    It does suck if brokers are going to be inflexible so to speak when it comes to the strike prices. Still, I thought it was a very refreshing take by Bogdan to introduce the Strangle Strategy to Binary Options Trading.
    I will be looking forward to reading the results of demo trading or even real money trading right here.

  6. #6
    Junior Member

    I made 99% of my trading profits from theta decay !!!

    I've read the article and it seems a bit too oversimplified when it comes about the Vanilla approach. It’s not easy at all even for vanillatraders. The prices are edgy and tricky. If you buy a Vanilla strangle, and underlying doesn't move quick, the position will start to bleed because of the theta decay. If, to make it worse, the implied volatility will go down, bleeding would accelerate. Vanilla traders are more interested in selling the Strangle (you know the saying that most options are expiring worthless) but selling it without an accurate forecast of the underlying and the implied volatility can be a very bad idea. What I would do – but it’s not my thing – would be to forecast the historical volatility on MT4 and buy a customized Strangle (for the timeframe where I expect the movement) at the right time. (As broker for OTC vanillas, IKON is worth to be checked). If the expiry of the options from the Strangle is not correlated with the analysis, then the analysis is worthless and the trade would have a random impact.

    But this is for the Vanillas.
    For the binaries, you would have the possibility to trade them with expiry options, first. But not Bogdan G's style, because that’s not good. With expiry options means that the superior strike must be a Put, and the inferior strike a Call. Means that the underlying would have to expire between the strikes. If it expires outside the strikes, you will lose one option. At least you can’t lose both, as in the version from the article.

    But of course, best games hands down are Touch options. Michael is right, most brokers don't let you control the strike. You can’t pick the strike you want with your brokers, as the strike is always moving, and I can’t pick the strike with mine, as the strike is fixed at a broker-given level. There are some brokers that allow some degree of customization, but you won’t get enough freedom. I don’t know how many of you can sell (meaningly, bet on No Touch), that’s why I can’t speak too much about a choice when trading Strangles.

    In the end, the game is, a lot of times, a cold money-management loss control. If a buy is extremely cheap, given your volatility forecast, then go for it. If a sell is also cheap (meaningly that you sell very high thus the trade is cheap in terms of risked money), it's still a good go. For instance when volatility is high, and I feel it to be high, I would invest about say max 35% in buying a Touch strangle. (I don't mean equity quota of the trade, I mean the total of options prices, like 17+17 with a a total payout of 100+100 in case of Double Touch event) But if the volatility is very low, and the market is snoring, I wouldn't invest even 10%. Similar for selling. I quite gave up buying options, because I feel it to be bad for me. When you sell and you lose, you are taken money from. When you buy, you are willingly giving the money, in the hope to earn more. Throwing money off the window gives a very nasty feeling: when you are taken money from, at least you are powerless, and the loss appears as a major force, while when you are buying and nothing happens you fell like a fool! There were times when I payed 50% on a touch Strangle and nothing happened - not even enough price movement to allow me to exit flat - even during big news like the ZEW economic sentiment. After a few mistakes like this, I cured myself of buying. There was a time I was selling touch Strangles even @40% and making money like a maniac. Now I wouldn't do it for less than 80%, and I even wait for more than 100%, in my attempt to totally hedge the risk to have one leg blown up. Sometimes I have to wait days. My losses come because I lose my temper after a while and I take regular trades instead of strangles. Also another risk when trading fast touch strangles is the slippage. One of the legs gets filled, the other requoted and possibly the price would be so small that you don't take it anymore. Then the leg that got filled will take a loss, getting filled exactly because the pricing engine saw incoming quotes increasing the value of the option, while the leg that doesn't get filled has the same reason for not getting filled. Result is a big loss on the trade.

    People usually bet a palace, as the maximum improbable risk, and a house as the probable risk, to make a cottage as probable profit and a house as improbable profit. Rather, bet the house as an improbable risk, a cottage as the probable risk, to have a house as probable profit and a palace as an improbable profit, even if it takes a lot of time on anxious waiting for such conditions. For the ones with ears to hear.

    One more thing: remove this classification, strategies for beginners, strategies for intermediate and strategies for advanced traders. There is no such thing! As Yoda from Star Wars put it bluntly, "Do or do not. There is no try". The market will not forgive a beginner's mistake just because is a beginner. It has the same toughness for all of us. If you give crappy strategies to beginners and good strategies for advanced, the beginners will lose their cash. It's as simple as that. There is no edge for beginners vs edge for advanced. There is just edge!
    Last edited by fxeconomist; 12-30-2012 at 09:18 PM.

  7. #7
    Master Member Bogdan G's Avatar
    Quote Originally Posted by fxeconomist View Post
    For the binaries, you would have the possibility to trade them with expiry options, first. But not Bogdan G's style, because thatís not good. With expiry options means that the superior strike must be a Put, and the inferior strike a Call. Means that the underlying would have to expire between the strikes. If it expires outside the strikes, you will lose one option. At least you canít lose both, as in the version from the article.
    the value of the option[/I], while the leg that doesn't get filled has the same reason for not getting filled. Result is a big loss on the trade.
    A Put higher and a Call lower would create a Short Strangle, right?...it is already too complicated and a major benefit of binaries is their ease of use. I'm not saying it's a profitable strategy, I am just showing a way of deploying a Strangle for binaries. It has a lot of traps indeed and the main one in my opinion is the distance that price has to travel.

  8. #8
    Junior Member
    Quote Originally Posted by Bogdan G View Post
    A Put higher and a Call lower would create a Short Strangle, right?...it is already too complicated and a major benefit of binaries is their ease of use. I'm not saying it's a profitable strategy, I am just showing a way of deploying a Strangle for binaries. It has a lot of traps indeed and the main one in my opinion is the distance that price has to travel.
    There is a slight similarity to a Short Strangle with vanillas, because I want the underlying not to move, in my strategy construction. What I've actually described, to be more accurate to vanilla option lore, is a Long Guts, in construction; however, in intent, my construction resembles a Short Guts, as the Long Guts with vanilla options is used when big moves are anticipated, rather than aiming for small moves.
    There are too ways to create a strangle:
    1) ATM/OTM Put + ATM/OTM Call = Regular Strangle
    2) ITM Put + ITM Call = Guts
    Both of them look the same (the payout chart has the same profile). Because of the ITM state of the options, the Guts tip is way bigger than the Strangle tip.

    As in binary options: suppose underlying = 6000 ; then we have, as expiry options:
    1) Long Call @ 6100 + Long Put @ 5900 = Long Strangle
    2) Short Call @ 6100 + Short Put @ 5900 = Short Strangle
    3) Long Call @ 5900 + Long Put @ 6100 = Long Guts
    4) Short Call @ 5900 + Short Put @ 6100 = Short Guts

    It's quite hard to explain why the Long Guts in an european (expiry) binary form is more akin to a vanilla Short Guts. The difference is exactly the binary nature of the options. If underlying expires @ 6000, in my binary Long Guts, both options are winning.
    However, the same thing, done with vanillas, is a total failure in this case. The options have a big ITM premium at the moment of the purchase, as well as full time value. Until expiry, time value passes by, and the total output of the two options can't overcome the premiums payed.

    At the same time, your strategy is like a vanilla Long Strangle. You aim for a big move. If it ends up @6000, you lose both (both on your binary version as well as on the vanilla). The vanilla version wouldn't be expensive if the options are OTM, but its chance of winning is remote.

    I wouldn't even use the names from Vanilla trading for Binary strategies. It's pretty misleading.

    I never ever use expiry options in my trading.

  9. #9
    Veteran Member uj.forex's Avatar
    If you are risk-averse and want to play safe, then using Strangle strategy suits you the best.... Especially when you are well aware of the fact that large market movement would be seen shortly, so you enter both as Call option and Put option... both out-of-the-money... where prices are different but mature at the same time....

  10. #10
    Master Member Bogdan G's Avatar
    Quote Originally Posted by fxeconomist View Post
    I wouldn't even use the names from Vanilla trading for Binary strategies. It's pretty misleading.
    Just to make sure we understand each other: I would !
    Especially when I need to adapt for binaries a strategy that was developed for vanilla options. I am sure you understand the need for a basic explanation of the original vanilla strangle before trying to adapt it for binaries.

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