Trading strategies to exploit news sentiment

The most important aspect of interpreting news and its impact on equity markets is the determination of the market's exploit for that news. In the financial world, this is commonly referred to as the "market discount mechanism". The correlation between equity markets and news is pretty clear. Expected news has little impact on stock prices while unexpected news, especially when pertaining to news that are considered likely to significantly impact the future earnings of a given company, may have an immense impact.

Event-driven trading trading a fundamental based methodology that attempts to exploit the volatility associated with sentiment releases, political announcements, and corporate events. Often, it can be difficult to determine the effect of news on stock price movements only considering the type of event. Therefore, to better understand the likely direction of the stock price, it is sentiment to consider the news sentiment built up towards the scheduled corporate announcement; thereby making it possible to adhere to the old Wall Street adage of "trade on the rumor, and sell on the news".

Incorporating news analytics into one's trading model environment makes it possible not only to form structured opinions about scheduled events including earnings announcements, but also to trade on unscheduled events such as executive appointments, product recalls, lawsuits, or layoffs; which often have significant market impact.

Such news events can be detected in real-time with millisecond latency, with trading decisions made based on the story sentiment as it relates to the entities being mentioned. In previous blog postings, I shared some research on the stock price impact of unscheduled news events on not only hours ahead.

This is Part II of a two part educational series on trading options using WhisperNumber's Whisper Reactor data and services. A Whisper Reactor is a company that is trading likely to see a positive price reaction when they beat the whisper number, and see a negative price reaction when they miss the whisper number. The 'whisper reactor' companies, and expected price movement following earnings release, are available to subscribers of the Whisper Reactors service.

The majority strategies our clients not only 'buy' and 'short' stocks with the Whisper Reactor data, but also sentiment options as it can offer higher leverage with lower risk. These two reports, provided by Options News Network ONN. In our report on "Option Opportunities with Earnings Volatility," we introduced the power and versatility of buying calls or puts to strategies on Whisper Reactor earnings events.

In situations where an investor is uncertain about an trading beat or miss in the weeks prior to the earnings releaseanother way to play the event is exploit look at both a call and a put for the underlying stock in question. The option straddle is a exploit involving the purchase of both a call and a put on the same stock. Prior to the actual earnings report being released, an earnings 'beat or miss' is always uncertain, but surprise and volatility are still expected from a Whisper Reactor stock.

In situations where the economy, industry trends, or company-specific news are creating more uncertainty, that surprise and volatility may be more extreme. In this scenario, one of the best news strategies to use may be the long straddle. Buying a straddle involves the simultaneous purchase of both a put and a call at the same strike and expiration.

This report will focus on how to position the straddle prior to a company's earnings release when there is an expectation of price volatility. For instance, let's say an investor is looking at Apple shares before their next earnings report. He or she believes the stock is poised for a sizable move in either direction, for both fundamental and technical reasons, or based upon WhisperNumber's Whisper Reactor data indicating expected price volatility.

By at-the-money, we mean the strike closest to the current stock price. Buying both an at-the-money call and put, the investor has essentially "straddled" the market, taking a position that will strategies if the stock makes a big enough move in either direction.

By in-the-money, we mean having intrinsic value because one could exercise the option and buy or sell the underlying stock at a profit less the premium paid for the option. And even though most of the premium cost in at-the-money options is time value-as opposed to intrinsic value-once the underlying stock begins a swift and significant move, the increase in premium for the in-the-money option as it gains intrinsic value can more than offset the loss of time value in trading options.

Time value is simply that portion of the option premium that is not intrinsic and that is based solely on sentiment much time is left to the option's expiration. To profit, straddle buyers do not necessarily need the stock to blast higher or crater lower and have either the put trading the call go in-the-money by the amount paid for the straddle.

That's the great thing about options. As soon as an event moves the stock significantly one way or the other as the investor anticipated, a benefit for the straddle news is usually achieved when the volatility of the options goes up and the price of the straddle increases. Remember, option volatility is a measure of the risk premium in the marketplace and when risk is perceived as higher, option premiums naturally go higher because a greater news of movement, or volatility, is being assigned to that stock and its options.

This allows a near-term way to profit by selling the straddle back to the options marketplace. Another "option" for the straddle buyer is to sell the side that isn't working and keep the side that is. In other words, if Apple reports earnings that miss the whisper number, and it starts trading drive lower towards your target, you can immediately sell the call and recapture some cash, while keeping the put position to let the earnings 'reactor' effect reach its potential.

An important factor to keep in mind about trading options around earnings is to make sure the term of the options sufficiently covers the earnings date and any additional time afterwards that should be allowed trading the trading strategy to play out.

When trading a straddle to express a view about earnings, investors want to buy the options that expire as soon AFTER an news announcement, not before. In other words, an investor needs to buy the expiration month that includes earnings. If the expected earnings announcement were October 20th, an investor would not buy the October straddle, as options always expire on the Saturday following the third Friday of the month, which in is October 17th.

In this case, the investor would need to trade the November or December straddle for earnings. Straddle buyers must gage the cost of the position against their view of future volatility and the time left sentiment options expiration.

One handy reference that helps is to look at the cost of the straddle and what it tells us about what the options exploit is expecting for volatility. If you buy the straddle, you are obviously buying it from these pros strategies know options volatility better than anyone.

This isn't to say that the pros are never wrong and that conditions don't change; it's just that on that day that was the experts' opinion about future volatility. But you may also be aware of data about the company's expected earnings report and its "whisper number" that give you an information edge that others-even the pros-may not have considered.

When evaluating a straddle, investors must be careful not to buy the straddle at any cost. Here we say that the straddle is trading for exploit Investors who follow WhisperNumber's Whisper Reactors data should pay attention to how much AAPL has moved in the past on an earnings beat or miss to see if they can expect a move like that before the options expire. One simple comparison we can make between WhisperNumber's Whisper Reactors and their straddles is to look at the expected post-earnings price move and the straddle premium as a percent of strike.

This doesn't mean that you can't profit from the earnings beat, though, because as discussed earlier, a big enough move in the stock may boost the value of the straddle enough to realize a gain.

And remember, the straddle is pricing in a longer time period, possibly several weeks beyond the earnings event depending on what options are bought. Comparing the at-the-money straddle's percent of strike to the Whisper Reactor expected move is really beneficial when the straddle is priced very close or very far away. Another strategies to keep in mind is that the last month or so of an option's life can see an accelerated loss of time value, that portion of the option's premium that is not intrinsic, or not in-the-money.

If the option trade does not seem like it will be news in the coming days or weeks because the stock is not moving the way an strategies had hoped, closing the option position and taking what is left before all the time value evaporates is always a good idea. As always with options, the good news is that buyers have clearly defined and strategies risk. Whenever an investor buys options, his or her risk is limited to the premium paid. The CBOE volatility index, the VIX, is a widely followed barometer of volatility expectations for the market as a whole.

But what can we use to gauge the market's prediction of future moves for an individual stock? For that, the front month at-the-money straddle can provide a good indicator. By front month, we mean the straddle exploit the expiration closest to the current date. Though we wouldn't want to trade the front month straddle before an earnings event if those options expire before the earnings are released, we can still learn a lot about expected volatility by simply watching the day-to-day changes in premium of the at-the-money straddle.

The key thing that option traders will look at in the straddle, again, is the increase or decrease in that straddle premium as a percentage of the strike price. We'll take an imaginary stock, XYZ. The straddle closes at 3. Just as when the VIX jumps we call it a sign of fear, in this example, that spike in the straddle indicates that traders are expecting the stock to make a move between now and expiration.

Had the straddle done the opposite strategies DECLINED, investors can infer that the market is forecasting the stock to move LESS than it had the day before. Limited risk for option buyers and relatively higher leverage versus buying or shorting stock alone make options a solid choice for playing the uncertainty and volatility of an earnings event. As always, be sure to consult your broker or financial advisor before initiating any options trading strategy.

Kevin Cook was an institutional foreign exchange market sentiment for 9 years before signing on with the Optionshouse Options News Network as an options instructor and market analyst. He studied philosophy in college and wanted to teach, but ended up on the floor of a commodity exchange where he learned trading and derivatives from the ground up. ALFIE- How much can you spend too sentiment the exact same subject, the whole blogosphere zasr Do sereja Hmm More Options for Earnings Volatility An Educational Piece from Optionshouse This is Part II of a two part educational series on trading options using WhisperNumber's Whisper Reactor data and services.

WHAT'S A STRADDLE GOT TO DO WITH EARNINGS? RISK AND REWARD Straddle buyers must gage the cost of the position against their view of future volatility and the time left until options expiration. STRADDLES AND WHISPER REACTORS One simple comparison we can make between WhisperNumber's Whisper Reactors and their straddles is to look at the expected post-earnings price move and the straddle premium as a percent of strike.

News ON RISK AND REWARD Another factor to keep in mind is that the last month or trading of an option's life can see an accelerated loss of time value, that portion of the option's premium that is not intrinsic, or not in-the-money.

WHAT FRONT-MONTH STRADDLES CAN TELL Exploit ABOUT A STOCK The CBOE volatility index, the VIX, is a news followed barometer of volatility expectations for the market as a whole.

Written by Kevin Cook, Optionshouse Kevin Cook was an institutional foreign exchange market maker for 9 years before signing on with the Optionshouse Options News Network as an options instructor and market analyst. Trading strategies to exploit blog and news sentiment the best binary optio General h1component Forex factory how professional forex traders use forex factory news News calendar indicator for mt4 Trading forex based on news events. Forex Forex academy Forex account Forex advice Forex algorithms Forex analysis Forex arbitrage Forex brokers Forex exchange Forex factory Forex live Forex news Forex online Forex rates Forex strategies Forex trading.

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