Trading on news options with an example
Earnings reports: It is generally advisable to have a trading strategy in advance of an earnings report, because a stock can bounce around in a much wider range post-earnings, as compared to the swings in an index after a data release. In this case, the investor needs to weigh the merits of leaving the position unchanged over the earnings report or making changes prior to it.
Options Strategies — with Examples
Factors that should play a part in this decision include: The current state of the overall market bullish or bearish ; Investor sentiment for the sector to which the stock belongs; Current level of short interest in the stock; Earnings expectations too high or comfortably low ; Valuations for the stock; Its recent and medium-term price performance; Earnings and outlook reported by the competition, etc.
An alternative option could be to buy puts to hedge downside risk. It may also make sense to trade an earnings report for a stock where the investor does not have a position but rightly or wrongly has a high degree of conviction.
How Options Trading Works You can deploy a range of options trading strategies, from a straightforward approach to intricate, complicated trades. But broadly speaking, trading call options is how you wager on rising prices while trading put options is a way to bet on falling prices. Options contracts give investors the right to buy or sell a minimum of shares of stock or other assets. Deciding not to exercise options means the only money an investor stands to lose is the premium paid for the contracts. As a result, options trading can be a relatively low-cost way to speculate on a whole range of asset classes.
Key points to note are — avoid taking an unduly large position, and have a risk mitigation strategy in place to cap losses if the trade does not work out. Bolts from the blue: What should you do if the screens suddenly flash news of a terrorist attack somewhere in the United States, or war looks imminent between two nations in the volatile Middle East?
While this is one time when you may need to be proactive to protect your investment capital, a kneejerk reaction to sell everything and take to the hills may not be the best course of action. During times of geopolitical uncertainty, it may be prudent to rotate out of more speculative instruments and into higher-quality investments, and consider hedging downside risk through options and inverse ETFs.
How To Trade The News
While you should scale back your equity exposure if it is uncomfortably high, bear in mind that in the majority of cases, the short-term corrections caused by unexpected geopolitical or macroeconomic events have proved to be quintessential long-term buying opportunities. Tips for New News Traders Know the dates and times of important events: Information on the dates and times of key market events such as FOMC announcements, economic data releases and earnings reports from key companies is readily available online.
Have a strategy in place beforehand: You should plot your trading investing on the internet in advance, so that you are not forced into making rash decisions in the heat of the moment.
Know your exact trading entry and exit points before the action begins. Avoid kneejerk reactions: Rather than kneejerk reactions, make rational investing decisions based on your risk tolerance and investment objectives. This may require you to be a contrarian on occasion, but as successful long-term investors will attest, this is the best approach for successful equity investing.
Cap your risk levels: Avoid the temptation of trying to make a fast buck by taking a concentrated long or short position.
What if the trade goes against you? See the big picture: Often, investor reaction to a development may not be as expected. Being overly swayed by market sentiment may result in too many instances of buying high — when euphoria runs rampant — and selling low, when gloom and doom prevails. Consider the plight of the many hapless investors who were so spooked by the unrelenting tide of bad news in that they exited their equity trading on news options with an example near the lows, incurring massive losses in the process.
How To Trade The News
Best Buy NYSE: BBY is a great example of a stock where ignoring the steady drumbeat of bad news, and focusing instead on its valuations and turnaround prospects, would have paid off handsomely.
But as of Nov. The Bottom Line Trading the news is crucial for positioning your portfolio to take advantage of market moves and boost overall returns.
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