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Today we are looking at a hedged bearish strangle on NAB for its report tomorrow.

NAB is a good example of how we can use this strategy for future reports if we have a speculative view we want to trade, but also hedge.

From the chart below you can see NAB along with the rest of the “Big Four” have come off, triggered by a poor report from ANZ last week.

Since, Westpac has disappointed, and NAB is expected to as well.

Typically, you could just trade a Put, but trading directionally on reports can be rather risky as often we don’t have a solid idea as to how the market will interpret the report. So instead we often like to use a Strangle to make money if the stock rallies or falls. It must rally or fall by a certain amount, but it helps take the guess work out of picking the movement off the back of the report.

In this case though, we can feel comfortable with the assumption the report will not be great, considering the other two majors weren’t. The only issue to consider hedging is that the banks have fallen quite a lot already. In addition, they have fallen to key support levels. Although its fair to believe that NAB is likely to fall tomorrow, we can position the strangle so the upside acts as a hedge in case the fall is already “baked in”.

This strategy is great because it allows you to trade your view, but if you are wrong and the stock rallies you can mitigate the losses and perhaps even make money if you get enough of a rally.