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 Telstra Corporation Ltd.
Telstra is reporting in a couple of days (13/02). Often on a report Telstra can move by quite a lot but it is hard to predict in exactly which direction, so instead of going directional on the trade, we can use a “strangle” which can profit from Telstra moving either up or down enough.
We want to see a roughly a 4 – 5% movement on the reporting day as a rule of thumb for us to take a tidy profit.
Aside from TLS, there are many other stocks that are still to report, and are worth considering doing a Strangle on.