News Trading
Since news occurs every day, it can have a regular effect on the stock market. A lot of people wait to see how news is moving the market and then jump on to ride the wave of momentum in order to take a quick profit.
The goal in a news trade is to find a hot stock that is moving because of a news-driven story, perhaps good news in a sector, a government contract, a good earnings announcement or some similar activity. The idea is buy a short-term option that will appreciate during the day, allowing you to sell the option for a profit. A 50-cent gain on an option means a $50 profit on each contract (each option contract controls 100 shares of stock), which means a $500 profit on a typical 10-contract trade. The trade is designed for the short-term, with the goal to make a quick buck before the effects of the news fizzle out.
The first step in the news trade is to identify a candidate. Ask yourself:
- Is the company ready to make its quarterly earnings statement?
- Is the company ready to announce a stock split?
- Is the company in the running for a government contract?
- Is the company ready to release a new product that could storm the industry?
- Is the company the subject of rumors, even if they're not true?
- Is there a federal announcement or federal report forthcoming that could impact the stock?
- Has the stock been upgraded or downgraded by a brokerage firm?
Keep in mind, too, that the trade should go in the same direction of the market. Since you're looking to ride a wave of momentum, you'll want your stock to have the benefit of going with the flow of the overall market. It's tough enough to swim against the tide in a regular trade, but it's almost impossible to make a profit on a news trade when you're trying to beat the market's gravitational pull.
