Compare top 2 popular forex options strategies
Straddles
One of the most used strategies in forex options trading is the straddle.
Straddles are responses to volatility conditions. If the trader anticipates a big move but doesn’t know which way, a straddle strategy can be placed.
It involves buying a call and buying a put with the same strike price. One can vary the strategy by placing the call and put ATM or OTM.
The main advantage of the straddle is that it guarantees that the trader will be on the winning side. But this guarantee comes with a cost. The cost is the premiums to purchase the calls and puts.
The trade will be profitable only if the underlying moves beyond this initial cost region. A small move will not be desirable.
The straddle therefore best occurs in a low-volatility environment. When historical or implied volatility is at a low, the trader would consider buying straddles. If the volatility is high, the trader can think to sell straddles.
Strangles
Buy a put and buy a call at different strikes or sell a put and sell a call with a different strike prices.
If you believe that the price is not going to move big. This is a combination of selling a call and selling a put. Again, the trader can place the trades ATM or OTM.
The main advantage of a strangle is that the trader receives income when the market is range bound or very narrow. The risk is that the currency pair will move beyond the strike prices and begin to expose the trader to losses.
The buyer of the strange faces the maximum loss if the price stays between the strike prices. The seller of the strangle gets a maximum profit if the price stays between the strikes.
One of the most used strategies in forex options trading is the straddle.
Straddles are responses to volatility conditions. If the trader anticipates a big move but doesn’t know which way, a straddle strategy can be placed.
It involves buying a call and buying a put with the same strike price. One can vary the strategy by placing the call and put ATM or OTM.
The main advantage of the straddle is that it guarantees that the trader will be on the winning side. But this guarantee comes with a cost. The cost is the premiums to purchase the calls and puts.
The trade will be profitable only if the underlying moves beyond this initial cost region. A small move will not be desirable.
The straddle therefore best occurs in a low-volatility environment. When historical or implied volatility is at a low, the trader would consider buying straddles. If the volatility is high, the trader can think to sell straddles.
Strangles
Buy a put and buy a call at different strikes or sell a put and sell a call with a different strike prices.
If you believe that the price is not going to move big. This is a combination of selling a call and selling a put. Again, the trader can place the trades ATM or OTM.
The main advantage of a strangle is that the trader receives income when the market is range bound or very narrow. The risk is that the currency pair will move beyond the strike prices and begin to expose the trader to losses.
The buyer of the strange faces the maximum loss if the price stays between the strike prices. The seller of the strangle gets a maximum profit if the price stays between the strikes.
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