Using The Strangle Strategy On 20-Minute Binary Options (Part Of A Series)

The Strangle is not something you do when you need to take your frustrations out on a losing trade! A Strangle strategy is the exact opposite of the Butterfly strategy (which was discussed in another article using Nadex 20-Minute Binary Options. To review that article, click HERE.

While a Butterfly is best in a flat, non-trending market, a Strangle is best when the market is choppy. The Strangle strategy requires two simultaneously placed trades like the butterfly, but they are both OTM (Out of The Money) contracts. You want to buy the upper contract and sell the lower contract. For an article in this series which explains Out of the Money, In the Money and At The Money, click HERE.

A Strangle has low risk and therefore, no stop loss needed. You want a 1:1 Risk/Reward minimum. You are expecting that one side will lose but the profit on the other will cover the loss. Strangles are great just before a big news event when you know it’s going to make the market move, but you don’t know which direction. There has to be movement or this trade will just decay in time value, but because it is low risk, your loss would be minimal.

Doing the Strangle strategy on 20-Minute Binary Options are quick trades. They are low risk thus making it a great strategy for part-time traders.

Placing A Strangle Trade
As mentioned before, you want to do the exact opposite of a butterfly. Take a minute and wrap your head around that concept, because at first it may not make any sense. You want to buy an upper contract and sell a lower contract. That goes completely against the “Buy Low, Sell High” philosophy that you may have heard all of your life. In this case however, it works to Buy the Upper and Sell the Lower because you don’t know which way the market is going to move. You just know that it is going to move, so you are putting your predictions in before it happens, hoping to become profitable. If there is going to be news that may drop the market so far down, that your OTM sell strike price becomes ATM, you will be profitable. The opposite is also true. There are times when the news makes the market bounce so much that there is a retracement. When that happens, you end up profitable on both sides of your trade.

You will want to check your chart for a number of things before placing this trade. Again, make sure you are using Diagnostic Bars instead of Time-Based Bars. Check the Expected Ranges to see expiry times and choppiness. The market should be bouncing up and down. Look at Expected Volume to see if the market is exceeding what was expected. The next image shows what you should be seeing when you want to place a Strangle trade.

You will notice that the arrows show when the market breaks out of the expected range just beyond the red box area. If you look at the Expected Volume below the chart, you will see that the blue columns, indication actual volume, are far exceeding the yellow line indicating the Expected Volume. It is also interesting to note the correspondence between the exceeded Range and Volume. Volume seems to go crazy as the market breaks through the expected range!

How Do You Know Which Strikes To Choose?

If you have closely checked your charts and they have met the necessary criteria for a Strangle strategy, you are ready to enter a trade, but which strikes do you choose? You want to make as much as you can without risking more than $40 combined on both sides. Make sure that both contracts are OTM. The image below shows that the market is currently trading at 17893 making that strike price ATM. To place your Strangle trade, you could buy >17914 @ 18, risking $18, with a profit potential of $82, if held to expiration. If you believe the market is going to move up at least 21 ticks in the next 18 minutes, then buying that strike makes for a great trade. The risk is low so no stop loss or take profit is needed. To complete your Strangle trade, you could sell >17865 @ 86, risking $14, with a profit potential of $86, if held until expiration and not including fees. It is beneficial to exit when you reach your 1:1 risk/reward to profit on this strategy.

The combined risk on this trade would be $32, which follows the guidelines for this trade. Remember, you expect one side to lose and even if that happens, your profit potential on the other side far outweighs the loss, so you will come out profitable.

It is important to understand how the risk/reward ratio works to cover any loss you may have. For the trade listed above, let’s assume the market surged way up and settled at 17919. The sell side lost the $14 that was risked. To cover that loss, your buy side needs to make $14 plus the $18 risked on the buy side in order to be considered profitable in a 1:1 ratio. Let’s say you exited at $88 just before expiration for a profit of $70 on the buy side of your trade. Now you subtract your $14 loss and you are up $56 on this trade not including fees. Pretty good for paying attention to some news, indicators and your chart!

Now let’s look at a few real trades. All of these trades were performed within minutes of each other on 20-Minute Binary Options. There is one Strangle on each of the four indices. All have low risk and all were profitable. Nadex fees on each of these trades would be $3.60 and would be subtracted from the net profit.
To view a larger image, click HERE.

US 500
For this Strangle, the >2052.95 was sold at 89.5 for a risk of $10.50. It expired worthless. The >2057.95 contract was bought at 10.5 also with a risk of $10.50. Total risk on the trade was $21. The trade was closed out at 92.50 for a profit of $82 on the buy side. When the loss of the sell side is subtracted, there is a net profit of $71.50 before fees.

US SmallCap 2000
On this trade, the >1161.6 contract was sold at 91 which gives you a low risk of $9. Risking just $9.50 on the buy side, the >1167.6 was bought at 9.5 giving the trade a total risk of only $18.50. The buy side was exited before expiration when the current price reached $93 leaving a nice profit of $83.50 for that side of the trade. The sell side expired worthless but since the risk was low, only $9 was lost on that side of the trade giving the trader an overall profit of $74.50.

US Tech 100
For a $12 risk, the >4258.0 contract was sold at 88 and expired worthless. The risk on the bought contract >4270.0 was just $9 and profited $84 at closing when its current price reached $93. Subtract the $12 risk on the sold contract from the $84 profit for a total profit of $72 on a $21 total risk. That’s pretty good!

Wall Street 30
Total risk on this Strangle was a little higher than the other trades shown in this example, but still low at $26.50. The >17793 contract was sold for 91.5 and the >17820 contract was bought for 17. All $9.50 was lost on the sell side but the bought side ended up with a profit of $79 making the total profit on this trade $69.50.

Total profit on all four trades comes in at $287.50. Total fees would be $14.40 leaving a nice profit of $273.10 in less than 20 minutes! Remember this strategy is perfect for the times that the market is moving and you just don’t know which way it’s going to move.

Things To Remember When Placing A Strangle Trade

• Market is choppy or volatile
• Use only OTM Strikes
• Look at the Expected Ranges, market should be exceeding them
• Know about upcoming news that may affect your trades
• Sell a Lower OTM Strike
• Buy an Upper OTM Strike
• Make sure both strikes have the same expiration times
• Place the trades simultaneously
• No Stop Loss required
• Understand Risk/Reward and how it relates to being Profitable on this strategy
• Expect to lose on one side
• Have a reason for placing the trade

Conclusion
As with any new strategy that you learn, do not just jump in and think you can do this. Be sure that you try it out several times in demo before you try it live. Get a feel for how it works. Make sure you know what you are looking for in volume, range and news. Having a reason for placing any trade is critical to successful trading. In the case of a flat market or a range bound market, you need to be able to choose a different strategy. This is why it is important to know and be able to use various strategies that will get you the best results depending on the market conditions.

To learn more about other trading strategies and further your education as a trader, go to www.apexinvesting.com, a service provided by Darrell Martin.