Range-Bound Long Straddle Set Ups are More Predictable with Currencies

Trading options are not for the faint of heart, but one benefit is that skills learned in one medium often transfer over directly when different underlying assets are chosen for the exercise.  Whenever one views an investment pyramid that ranks risk and rewards for various investment vehicles, both options and forex trading appear at the apex of the diagram, signifying that significant risk applies in both arenas.  However, trading forex options can offer benefits from both trading modalities as long as you know what you are doing and can move quickly and adroitly within the market.

Options involve risks and are not suitable for all investors. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital.  This disclaimer is meant to encourage preparation and specialized training before actual option trading commences, and similar warnings appear on forex websites, as well, to emphasize the same prerequisites.  Assuming that training and adequate practice have been handled, a simple Long Straddle strategy works well in a number of forex situations.
Every forex trader is familiar with trading on the news.  Government agencies release economic data at scheduled times of the month that can potentially move the market a considerable amount in a short period of time.  There is also another situation that happens daily that is reflected in the diagram below of the GBP USD currency pair:

The forex market is the largest and most liquid market in the world, trading some $4 trillion per day in actual turnover.  The market opens in New Zealand in the morning and then follows the Sun around the globe.  Trading in the GBP USD pair is very light in these early hours.  As noted on the chart, the pair “sleeps” until the Frankfurt exchange opens.  At that point, pent up demand creates an immediate trend in one way or the other, almost like clockwork.

A Long Straddle strategy works best in a market-neutral situation where prices are range bound, volatility is low, but the expectation of the investor is for an immediate breakout from the predominant ranging trend.  The problem is that the investor does not know the direction that the severe move will take.  The strategy entails buying a long put and call about the range, and then, once the move is made, attempting to sell the losing option or accept the loss of the premium value.  As long as the move is significant in one direction, i.e., the strike price is greater than the sum of the two premiums, then breakeven is assured.

On this single morning, the market quickly rose 100 pips before pausing to consider its next cycle.  As for trading on the news, the GBP USD also demonstrates a similar behavior, most notably on the first Friday of every month.  The Department of Labor releases its non-farm payroll data for the previous month at 8:30 AM EST.  Typically, pricing behavior goes into stall mode in anticipation of the news.  After its timed release, analysts require roughly thirty minutes to assimilate the data and form their various opinions of its impact on currency valuations.  Once again, a long straddle option strategy provides a design that matches the situation at hand.

Trading options requires knowledge, experience, adept technical skills, and emotional control to be successful in this genre.  Skills learned trading stock options can be easily transferred to the currency markets.  Not all forex brokers, however, offer options trading, but the major ones do.  Besides plain vanilla options, a variety of binary options may also offer preferred strategy setups to your liking.