Strangle Strategy: How to Squeeze All the Profits You Can From an OTM Nadex Binary Trade (Part of a Series on Binary Strategies)

What is the Strangle Strategy? The easiest way to remember this strategy is to think of buying two Nadex Out Of the Money (OTM) contracts and like placing your hands around someone's neck, you are trying to squeeze all the money you can out of the trade. Because both trades are entered into OTM, there is very low risk to this trade. It usually looks more attractive than a straddle because of this lower risk. However, if the target is not hit, it usually has a total loss, so it will lose more often than a straddle.

To do this strategy, choose OTM binaries with $5 to $20 risk. The way to obtain this lower risk is by selling the lower strike and buying the upper strike. This strategy is usually used in relation to an upcoming news report and can potentially offers a nice payout no matter which way the market moves. It could be used if there is something else that is making you believe there is another big move expected. You want to have a 1:1 ratio. Let's look at an example to better understand how this works:

There was a US Unemployment and a Non-Farm Employment Change Reports coming out with an expected 100 pip move affecting the EUR/USD market. The plan was to have a cost of less than $25 trading on Nadex binaries. With this type of strategy, you don't have to pick a direction; as long as the market moves far enough up or down, the trade would be profitable.

Before the report, the EUR/USD was trading around 1.3590. If the move is expected to be 100 pips, then the strikes you pick need to be within 100 pips from where the underlying is. For example, strikes from the market underlying of 1.3590 and down to 1.3490, would be below but also within 100 pips of the EUR/USD, and strikes from the market underlying of 1.3590 and up to 1.3690, would be above but also within 100 pips of the EUR/USD. Your plan would be to exit at approximately a 1:1 risk to reward ratio. Remember, when trading on Nadex, you can enter and exit multiple times before expiration.

Continuing on with this example, you could have sold the 1.3520 (11AM) contract for approximately $90. This gives you a $90 profit potential and a $10 risk. You could have bought the 1.3660 (11AM) contract for about $10 which would also be a $90 profit potential and a $10 risk. Both of these combined gives you a risk of $20. This would fulfill the goals of having the max risk under $25, the buy strike below the expected high and the sell strike above the expected low.

So, what happened? The report came out and the market flew up. The strike you sold for $90 (1.3520 11AM) ran up and took the maximum loss of $10. The strike you bought, flew up and ended up at the maximum value of $100. You could have easily exited the contract at $50 within minutes of the news release. The chart below shows the massive jump the EUR/USD made when the report came out.

Even if you exited with the minimum take profit of $50 minus the $10 loss, that's a $40 profit in a matter of minutes! Instead, you could easily do 10, 20, 100 or more Nadex contracts for exponential profit.

On the flip side, what would have happened if the news report was different and the market stayed flat? Worst case scenario: you would lose on both contracts and be out $20. This is a low risk strategy that has the potential for profit as long as the market moves.

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