For those want to know what a STRANGLE is ...

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    Hmmm... Bears don't read this ... lol

    The Slingshot Strangle

    Catching market bottoms is a great approach — for traders with crystal balls. If you're like most traders, though, The odds are that you'll miss the reversal point while waiting for confirmation of the trend change. A variation of the option strangle trade gives you more time to "fish" for a market turnaround while simultaneously capping your risk level.

    By KEVIN LUND



    It’s one thing to believe a market reversal is coming, but it’s something else predicting exactly when it will occur.

    Most of the time, trying to catch tops and bottoms results in getting caught on the wrong side of the market. Unfortunately, although phrases such as “Don’t catch a falling knife” are mantras in the trading world, some traders stubbornly continue to try to outsmart the market.

    There is a useful technique, however, for bottom-fishers with a little patience and market insight: the “slingshot strangle” (slingshot for short), a reversal strategy using options that can be entered with minimal risk even when extreme pessimism is rampant in the market. It is an often-neglected option strategy that is worth dusting off the next time you find yourself close to a market rebound.

    Strangle basics

    A traditional strangle is nothing more than the simultaneous purchase of a call option and a put option with the same expiration date but different strike prices. Typically, the call and put are both out-of-the-money (OTM). An example would be to buy a 45 call and a 35 put on a stock trading at 40.

    Traders use strangles when they expect an imminent breakout in the underlying issue but are unsure in which direction it will occur. When the breakout occurs, either the call or the put profits on the move, while the other side loses. If the move is large enough, the winning side will gain much more than the losing side loses.

    There is really no hard-and-fast rule about the options being out-of-the-money. Strangles can contain options that are both in the money (ITM), or one in and one out, depending on a trader’s degree of bullishness or bearishness. The slingshot strangle consists of a call and a put that are both in the money.

    The greatest advantage the slingshot strangle has over other reversal strategies is that it retains most of its value until a major move occurs in the underlying market. Its drawback is that profits initially come more slowly compared to other short-term strategies.

    Setting the stage:

    Panic at market bottoms

    Just before a broad market sell-off bottoms out, the selling is largely indiscriminate and driven by panicky investors “throwing in the towel.” The selling pressure becomes so extreme the market typically becomes oversold, like a rubber band that has been stretched too far.

    At some point a positive catalyst emerges to release this pressure, replacing pessimism with optimism. What follows is a high-volume rally as traders cover the short positions they established when the market was selling off. The momentum of this reversal is analogous to the catapult action of a slingshot.

    During such heavy selling periods — and prior to the appearance of the catalyst — some aggressive traders attempt to pick up stocks at cheap levels. Not surprisingly, they wind up losing large sums of money when, as we’ve seen many times in the last couple of years, a rebound never occurs.

    Making the trade: Finding the right stocks

    The slingshot strangle allows you to enter a trade without confirmation of an upside reversal, while limiting risk to only a couple hundred dollars. In addition, you also can profit if the market continues to drop, provided you follow a few simple rules."


    This is only my view ... read the red stuff.

 
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