Making money in trading is all about finding stocks that make big moves and using options related to those stocks to capture profits from even bigger moves. Our trading methodology around stock news — such as earnings announcements, mergers and product release news — as well as broader economic events — like unemployment reports, Fed minutes and home sales figures — can help you anticipate and make money from large price moves in an option.
The trick is that we’re not the only ones who know that stocks may move a lot after a news event. But since everybody knows the information, there are certain predictable responses that happen in the market prior to a news event.
That’s not to suggest that everybody knows the same thing and will act in the same way. In fact, different groups of market participants tend to act very differently.
To help capitalize on these diverging groups’ actions and find options trades to profit from them, we follow 3 main principles when trading the news.
1. We avoid buying too much options premium by circumventing crowds, trading peers or “selling news after the fact.”
Knowing how to avoid paying too much can be tricky unless you’ve navigated the markets like we have. You have to understand how options are priced and under what conditions would create a good buying opportunity by dropping the price versus when a drop in price signals a red flag. That’s where we come can help you.
2. We look for stocks with indirect exposure to a news event to avoid paying too much — and to find more opportunities.
A favorite strategy of ours to accomplish this is trading an undervalued stock that’s very sensitive to its peers’ earnings announcements. This can also be true of economic reports. For example, if we’re expecting an interest rate announcement in the United States, that announcement will affect bond prices. There is a short list of banks that will be impacted by that report which will, in turn, wield some influence on other smaller stocks that are more peripheral in nature. Those smaller stocks are often where we turn our attention for trading opportunities.
3. We’re willing to take profits before the news even appears — that is: sell “picks and shovels” to the near-term gold miners.
Often, we’ll buy into a scheduled earnings announcement long before a buzz is generated so that we can get positioned before price inflation occurs … and then we’ll exit just as the crowd starts to come in to avoid the risk of a reversal.
Because we frequently trade into and out of the same stocks and ETFs, we’ve gotten to know how these anticipated moves turn out, what the probability is for a winner, how large the winners will be and when to exit. We know that trading the news can be tricky, particularly because of how option pricing works. So, even if you’re right about the direction of the stock after an announcement, a lot of new options still end losing because they don’t understand how option price variables can be affected materially by other options traders in the market and how to avoid those dangers.
At SlingShot Trader we can do the research for you. Join today and get 1 free month.