WES is reporting its half-year results on Friday (18th) and like many of the companies reporting this season we are looking to apply a strangle spread strategy.
WES is currently trading at $54.40.
Like many stock that report half-year or full year reports, WES’s share price is expected to have move on the results. And like other stocks reporting this season, it would be hard to say which way the stock will go. If the report is received well, we may see large share price gains. If not, we could see WES tumble. Regardless, it is fair to say we should see a decent move either way.
In this scenario, we can look to implement a strangle which will profit from either a large fall or rise. It will lose if we see neither. In other words, if little to no movement occurs on the back of the report the trade starts to lose money.
This strategy involves buying a Call and Put option. The profit is practically unlimited, and the risk is limited to what you paid to enter. The risk, if set up correctly is impossible to lose overnight and therefore damage can be mitigated.
Lets run through the trade:
The above image shows the purchasing of both a Call and Put option. Both will expire on March 18th. It is only if we did not close the position by then could we lose the entire capital risk of $11,860.
How much risk is up to you of course – this is just an arbitrary number.
The image on the right shows the current share price in grey, with 1% price incriminates both rising and falling.
It shows how much profit or loss is made at different price for both today and the 18th when the stock reports.
So, if we see a 5% rally by the 18th, $2,620 is made. If we see a 5% fall, $2,860 is made. But if we see no movement and the share price stays the same, the loss is $400.
These are rough prices, and it is important to also take into account volatility shifts.
Regardless, it is a great strategy for reporting when you don’t want to trade one direction and expect a large movement.