What is a Long Strangle?

Published 24-FEB-2017 10:35 A.M.


2 minute read

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Most traders can profit from a falling market or a rising market exclusively, but what if you could enter a trade where you could potentially 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.

It should be noted here that no matter what investment strategy is used, investors should seek professional financial advice for further information about those strategies and the stocks they are interested in.

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 US 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

You can see over the past week or so, ILU has been consolidating leading into its report. ILU 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. In fact, last year, ILU rose by large percentages on the back of its report.

The Strangle is a great strategy to take advantage of a key volatile event, which will profit from ILU either rising or falling to a certain point. This has been a great strategy for many of clients this reporting season.

Again, strategies should be used in conjunction with professional financial advice, especially as

Aside from ILU, there are many other stocks that are still to report, and are worth considering doing a strangle on.

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S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

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