The Straddle strategy has been used by digital options traders for quite some time. This strategy is actually quite simple, requiring only basic math skills. Analysis matters very little when using this strategy and that is quite rare to hear. But once you know what this strategy entails, you’ll understand why analysis can be placed on the back-burner when using this method of trading.
Straddling a digital options trade simply means to take both positions on it. Yes, you read that correct – you’ll be purchasing both a Call and Put position for the exact same asset, using the exact same (or close) expiry period. If the exact same expiry period is used, one of these trades will finish in the money, while the other will finish out of the money. This is guaranteed.
Sound silly? Well, this is where the strategy comes in. Prior to purchasing these options, you’ll need to compare the profit and loss numbers. The goal will be to ensure that the profits from the winning trade are going to eclipse the loss amount from the losing trade, leaving you with some amount of profit. The profit amount may not be huge, but any earnings are good earnings!
Another way to straddle would be to perform some analysis and then invest a larger sum on the position that you feel is correct. You could then straddle the trade by purchasing the opposing position, but with a smaller investment sum, as a means of offsetting loss should you initial price movement forecast be incorrect. Again, if the trade finishes in the money, the total earnings will be reduced by the cost of the OTM trade, but you’d still be locking in some profit.
Digital options makes it easy to use this strategy by displaying prospective profit totals within each trade window. With your investment sum selected, you’ll be able to see the exact amount that you stand to earn should the trade finish in the money. The prospective loss amount will of course be the exact amount that you’ve decided to invest.
The Straddle strategy can be quite effective, especially when you have limited time for analysis yet want to trade digital options anyway. Just be sure to run the numbers prior to trading. You’ll want to make sure that you’ll be earning some amount of profit with each set of straddling trades that you execute.