Most of the Forex trading strategies depend on predicting the direction of the market and then trading that market direction. For example, you need to determine whether the market is trending up or down. If the market is trending up, you will go long in the direction of the market and if the market is trending down, you will go short. This is how it works. You will be told again and again, never trade against the direction of the market.
But is there a way that does not depend on the market direction? Let’s discuss in this article a currency options trading strategy that does not depend on the market direction. No matter, in which direction the market moves, this currency options trading strategy will make profit for you.
You might have heard about put and call options? Put options gives you the right to sell a security or a currency pair 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 the Forex market. Many trader simply trade the spot market but let’s say you think that EURUSD is going to move significantly but you are not sure in which direction. This can happen at the time of the release of the NFP report. Whatever, 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 whether it will be up or down.
You buy one put option on EURUSD and one call option on EURUSD with the same strike price and the same expiration date. This options trading strategy is called a Straddle. You form a straddle by buying put and call options with the same strike price and the same expiration date. Now, if the currency pair EURUSD makes a big move in the market no matter what the direction, you make a profit. But this strategy will fail if the move was not big and was only slight.
In the same manner, you can form a strangle that is less costly then the straddle. You buy a put and a call options contract with the same expiry date but different strike prices. Again this strangle will make a good profit for you if there is a big EURUSD move in the market.