Most traders can profit from a falling market or a rising market exclusively, but what if you could enter a trade where you profit from both?
The Long Strangle can profit from both a rise, and a fall in the share price, meaning you don’t have to have a strong directional view. You must have a certain amount of either bullish or bearish movement in a certain period of time in order to profit.
It’s a great strategy which we often use during reporting seasons so we thought we would explain how they work.
So when would we use one?
A strangle is typically used at points where picking a direction is difficult, but you believe the market or stock is going to strongly move in either direction. Typically it’s a strategy we use around big volatility events.
From a technical perspective, a Strangle can also be used when a stock approaches the point of a triangle or pivot point, with the expectation of a large break out.
If you consider using this strategy for a company’s report, then make sure to check the historical movements of the stock. Typically we like to look for a four percent or more move following its report to make a good profit. If a company consistently moves up or down the day of, or following their report, then it is potentially a good candidate for this strategy on its upcoming report.
Let’s run through an example.
If you thought Newcrest Mining Ltd (NCM:ASX) was going to have quite a large move when it is due to report on the 11th, then we can look to use this strategy.
It involves simply buying a Put and Call Option. You do have to tweak it correctly by picking the right strikes and the right expiry, and the right risk amount. Often I like to start out by choosing one strike above and below the share price for the Call and Put respectively.
Its also important to keep an eye on the implied volatility of the options with this trade. Often the days leading into the report you see a fair rise in implied volatility and the trade can get expensive. This can sometimes be a trap for novice traders. Instead, I would suggest entering atleast a couple of days prior to the report.
If you’d like help setting up this strategy you can get in contact with us. We also run seminars teaching you how to trade this strategy and many more. Finally, we can provide the technology to assist you in making decisions and how to tweak these trades to suit your view and risk profile.
This Thursday we’ll be running a webcast on how you can use this strategy plus much more – click here to register your place.