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 SHL which is currently trading at $23.64
SHL is reporting on Wednesday (18/02). Often on a report, SHL’s share price can move quite a lot; last year it fell almost 4% on the open. It is hard to predict how the market receives the report, so instead of going directional on the trade, we can use a “strangle” which can profit from SHL moving either up or down enough.
We want to see a roughly a 3 – 5% movement on the reporting day.
Aside from SHL, there are many other stocks that are still to report, and are worth considering doing a Strangle on; BHP, SGP, SGM, WOR, and WOW to name a few.
Before trading any of these stocks though, it’s worth checking out how much the stock has moved historically on their reports. Some historically move more than others and those are the ones you want to consider.