Most forex trading strategies depend on predicting the direction of the market and then negotiating that direction of the market. For example, you need to determine whether the market is trending up or down. If the market is trending up, you will go a long way in the direction of the market and if the market is trending down, you will get short. That’s how it works. You will be told over and over again, never trade against the direction of the market.
But is there a way that does not depend on the direction of the market? Let’s discuss in this article a currency options trading strategy that does not depend on the direction of the market. No matter, in what direction the market moves, this currency options trading strategy will make profit for you.
You may have heard about put and call options? Put options offer the right to sell a bond or a pair of currencies at a certain price before a certain date. On the other hand, a call option gives you the right to buy a security or a currency pair at a certain price before a certain date.
Now, currency options are an alternative method of trading in the forex market. Many traders simply trade the spot market, but let’s say you think EURUSD will change significantly but you are not sure in which direction. This can happen at the time of the release of the NFP report. Anyway, suppose, you have this strong feeling that the EURUSD pair is about to make a big move in the market, but you are not sure about the direction of the move, either up or down.
You buy A put on EURUSD and a put on EURUSD with the same strike price and the same expiration date. This option trading strategy is called Straddle. You form a straddle by buying put and call options with the same strike price and the same expiration date. Now, if the EURUSD currency pair makes a big move in the market, no matter what the direction, you make a profit. But this strategy will fail if the movement is not large and is only slight.
Similarly, you can form a bottleneck that is less costly than the straddle. You buy a put and a call options contract with the same expiration date but different exercise prices. Again this bottleneck will make a good profit for you if there is a large EURUSD movement in the market.