Options trading is virtually predestined for speculation on market movements of unknown direction: for decades, strategies have been used by traders to profit from a sharp rise in volatility. The best-known approaches include "long straddle" and "long strangle". Both strategies are not only used in connection with news trading and can be applied to almost any asset class.
In a "long straddle", one call and one put option with identical remaining terms are opened at the money. The stake is thus equal (excluding transaction costs) to the sum of the two option premiums. Rising prices lead to gains in the call option and losses in the put option. The "breakeven" is reached when the price gains in one option exceed the price losses in the other option. The maximum loss (100%) occurs when the market does not move at all and both options expire at the money. The maximum profit is theoretically unlimited (at least if prices rise).
The size of the option premiums depends on the implied market volatility and the remaining term. If the latter is chosen to be very short, the stakes are lower. Option strategies are particularly profitable in quiet markets with a subsequent significant increase in volatility - this is why strong price losses in particular lead to high profits due to the speed often observed in the process.
Long Strangle
With a "long strangle" you can speculate on price movements with a somewhat more aggressive basic orientation. In contrast to the "straddle", the two options are not opened at the money. Example: The DAX is quoted at 8,000 points. A call option with a strike price of 8,200 points and a put option with a strike price of 7,800 points are opened.
If the market quotes within the range of 7,800 to 8,200 points on the maturity date of the options (the distance of which should again not be chosen too far away for the purposes of news trading), a total loss occurs. Breakeven occurs when either the call option or the put option has such a high intrinsic value that both option premiums can be amortised.
An metatrader account is not necessarily required to implement the strategies. Alternatively, warrants can be used, which should be available in sufficient numbers for most underlyings. Especially with very short remaining terms, it is important to keep an eye on the spreads - both when trading via an exchange and in issuer trading.
Special cases: short positions and digital options
Most considerations with regard to trading news relate to the expectation of more or less large market movements as a result of the news. If the market is collectively convinced of high fluctuations, this is reflected in the option premiums. In this case, a strategy with short positions in options trading may be suitable if one's expectations do not foresee market movements.
Short Positions
A short position in options trading should not be confused with the widespread equation of "short" and "falling prices". "Short" in options trading means selling options in the writer's position and collecting the option premium. The writer suffers losses when an option can be redeemed in the money.
In the case of a short straddle, a profit is made if either both options expire worthless at the money or the intrinsic value of an option is less than the sum of the option premiums collected. Mirroring the "long straddle", the maximum profit is thus limited to the sum of the premiums, while the maximum loss is theoretically infinite if prices rise. Short positions in options trading are not possible with all brokers and are essentially suitable for experienced traders.
Digital options
Digital options, which have been increasingly advertised as "binary options" for several years, are a special case. A digital option differs from classic options by its discrete, two-stage payout model ("all or nothing"). Individual option types, including barrier options in particular, are also suitable for news trading.
It should be noted, however, that the still young market for binary options has various structural weaknesses. For example, almost all providers on the European market are based in Cyprus, Malta, etc.. Moreover, most "brokers" are merely whitelabel partners of a few platforms from the mostly southern/south-eastern European region, whose pricing is hardly subject to competitive pressure.
