There is a strategy known as the “Collar Strategy” when trading binary options. It is based on assumptions of sideways market movement and collecting premiums. This Collar strategy simply consists of selling a Call option and selling a Put option at the same time. In the case of the Collar strategy, the idea is to make money and lower costs when the market is moving sideways or is dormant. When the trade is executed, the trader receives cash from the beginning of the position. To demonstrate this strategy, here is an example.
A trader decides to sell a binary option Call on Apple stock at 50 Euros when the price of Apple is currently being traded at 45 Euros. The asking price of the Call option is 2 Euros. If the trader sells this Call at the same time he sells a Put option at 40 Euros also for 2 Euros of issue, he therefore net collects 4 Euros.
With this Collar strategy, we sell binary options at the same time. Returning to our example and imagine that the price of the Apple stock ranges between 45 and 48 Euros, our trader will be making money because he has sold “‘out of the money” options. If the market price rises up to 55 Euros, then the Call option will be losing money. If the price of the Apple stock falls to below 40, then the trader will also be losing money on the Put option.
Use this Collar strategy when you have a good feel for the markets and the price action of the underlying asset. A trader should also only use a Collar with a broker who charges no fees to trade, otherwise the cost of fees to open and close the position could eat into whatever premiums you collect.
This strategy is also dependent upon a “no news” market. With regards to the US market, the summer trading months are an example of this. Many traders take vacations, and barring any major economic developments usually the market has all the information concerning a stock already discounted into the bid/ask price. Quarterly reports when issued reflect the expected given trading price of a stock. Also a given company is usually not making any special announcements concerning new products which give stock analysts no reason to project a new trend developing in the price action of a stock.
In conclusion, the Collar strategy can be interesting to trade binary options if you already have good trading experience. Intrinsically by its’ name, a collar implies something which harnesses the power of an animal or apparatus to bring it under control of the user. The same concept is with binary options. You place trades thinking that you have control of the price movement of the stock, thereby collecting premium for your account. Only time will tell if you anticipated correctly.