Binary Straddle

• Normally, you have to forecast direction and magnitude of asset price movement to win a binary option bet. To remove direction from the equation, traders may purchase a straddle: a call binary option coupled with a put, both at the same strike price. For example, a four-hour at-the-money (asset price equals strike price) binary call on the EUR/USD currency pair (the euro versus the U.S. dollar) may cost a $25 premium and require a rise of 0.2 percent (known as 20 pips) to pay off. The put may be priced similarly. For an investment of $50, you are betting that one of the two options will pay off $100, a profit of 100 percent. If the currency pair hasn't moved 20 pips at option expiration, the $50 is forfeit.
  
  

Binary Strangle

• This strategy is similar to a binary straddle, except the call strike price is higher than the put strike price, with the current asset price in-between. This results in lower premiums, since both options are out-of-the-money: the call strike price is above and the put strike price is below the current asset price. The option premiums in our example might fall from $25 to $15 each, but the required move might be increased from 20 pips to 25. You end up paying less, but your chances of winning one side of the bet are diminished. You can simulate a strangle by choosing a straddle with a further-removed strike price, although the strangle may still prove to be more economical.
  
  

Hedging

• A binary option can be used to hedge a short term trading position. This is especially attractive to day traders. For example, you may be bullish on the EUR/USD currency pair, but to be safe you enter a stop loss order (an order to sell at a loss) 30 pips below the current asset price. You can buy an inexpensive put binary option with a strike price equal to your stop loss price. This way, if you are stopped out with a loss, you at least collect on the winning put trade. Of course, if prices move lower without hitting your stop loss, you still will lose money on the primary trade and money on the binary option.
  
  

Writing

• You can also write (sell) binary options. In this case, you are betting that the asset will not have breached the strike price at option expiration. You collect the initial premium when you sell the option, and hope the option expires worthlessly. If, however, the option expires in-the-money, you must pay the option buyer the payoff amount. Writing options is a strategy you can employ if you don't expect asset prices to move significantly, or if you expect them to move in the opposite direction.