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.
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. Examples include reporting seasons, a U.S election, Brexit, or any other large economic event.
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.
Let’s run through an example.
The chart below is of CBA which is currently trading at $77.91.
The RBA is announcing its rate decision tomorrow at 2:30, like it does every first day of the month.
This is a rather pivotal decision. There is a lot of mixed opinions about whether the RBA should lower rates or not, but regardless, the market has priced in a 100% chance of cut tomorrow, and rallied on the back of it.
Whatever the RBA decides tomorrow could move the market quite a lot, including CBA which has benefited off the market opinion of a cut. You can see CBA has been subdued leading into the decision tomorrow, indicating it is waiting for it. It could rally, it could fall. It’s too hard to know, so instead of trading a bullish or bearish strategy, we can do one that takes advantage of both.
We need to see a strong fall, or a strong rise, so this is a strategy we also often employ during reporting seasons.