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 particular 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 is going to strongly move one way or the other. We like to use it around big volatility events. Examples are things like reporting seasons, the U.S election, Brexit votes, or any other large economic events.
From a technical perspective, a straddle can also be used when a stock approaches the point of a triangle, expecting it to break one way or another.
Let’s run through an example.
The chart below is of Santos Ltd (STO)
STO will report tomorrow, and though we do not know the report, or how the market will interpret it, we suspect it is likely to either rise or fall significantly. Typically STO either makes large gains or heavily losses following this type of report.
The Strangle is a great strategy to take advantage of a key volatile event, which will profit from STO either rising or falling to a certain point. This has been a great strategy for many of our clients this reporting season.
Aside from STO, there are many other stocks that are still to report, and are worth considering doing a strangle on.