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 Santos Ltd (STO) which is currently trading at $6.26.
STO has been trading in a strong uptrend, and recently pulled back from its high to create a short term counter trend. This puts STO right at the point of a triangle pattern and we should see a break out over the coming days.
STO is also reporting on the 23rd of August which should be the catalyst for a strong move. Not only do we not know if it will be a good or bad report, we don’t know how the market will receive it. This can make playing a directional move rather difficult and rather speculative.
Instead we can trade a Strangle, so that regardless of which direction STO runs on its report, we can potentially make a profit.
Its 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 at least a couple of days prior to the report.