When companies report, they can move a great deal as analysts and pundits speculate on the future direction of the stock.
It can be tricky to predict how these stocks will report. Furthermore, and more importantly, it can be difficult to predict how the market will react to these reports. Trading a report can therefore be daunting and may seem attractive to only the seasoned professional or high risk taking punter.
But, there is another way.
Utilising Exchange Traded Options (ETOs), specifically the “Long Strangle or Straddle” a trader can profit from both strong bullish AND bearish movement. Losses are incurred with a drop in volatility and sideward movement.
ETOs are the most flexible instrument tradeable on the ASX. Its common to see strategies that profit from multiple directions. In this case, the strategy profits from either a strong rally, or a strong fall.
Below is a quick breakdown and example of how it works. There are, of course, other considerations and minutia, and new traders should consider seeking professional education before jumping in.
The Strategy: Long Strangle
- Profits from both a rise, and a fall in the share price.
- You don’t have to have a strong directional view.
- Must have a certain amount of either bullish or bearish movement.
- Movement must occur quickly (within a day or two).
- Can be skewed to be more bullish or bearish.
When to Use
- Volatility events where large share price movement is expected.
- When it’s difficult to pick direction.
- A hedge is needed.
- Strong break outs.
If Trading the Report:
- Check a handful of previous reports movements
- 5% move is a minimum rule of thumb
- Enter a couple days prior as implied volatility will likely rise leading into the report.
Example: Sydney Airport Holdings Pty Ltd (SYD)
- SYD is trading at $7.78.
- Reports in two days (20th of August).
- Risk = Premium: $5,325
- Profit target is an 6 – 10% share price movement.
The payoff matrix below shows the profit of the trade. For example if the share price rallies 6% to $8.26 by the reporting date highlighted, $1,875 is made in profit. The original investment was $5,325. Therefore the profit is roughly %35. If the share price falls 6% to $7.32 by the reporting date, then only $975 (18%) is made in profit. Finally, if the share price stays the same come the reporting date, then a $300 (5%) is lost.
If you would like to learn how and when to use this strategy, and other strategies like it, then please contact us here at TradersCircle on 03 8080 5788. Alternately, you can access some free resources off our website which runs through advanced strategies.