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9 Weeks to Better Options Trading: Special Situations: Earnings Reports, Takeovers, and Extreme Market Moves

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Veteran options trader Steve Smith breaks down special situations.

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Editor's note: To help investors profitably navigate the options market, Minyanville is launching "9 Weeks to Better Options Trading," an educational series aimed at increasing trader understanding of the nuts and bolts of options, with an emphasis on real-world applications. In this series, veteran options trader and author of OptionSmith (Click here for a two-week FREE trial and get Steve's best trading ideas in real time) Steve Smith will demystify a range of topics from options pricing to trading strategies to special situations like earnings reports and takeovers.

For the first article in the series, click here.

If you are a novice options trader, we suggest you start with Steve Smith's 6-Week Options Trading Kickstarter series.

MINYANVILLE ORIGINAL It may be the ninth inning in the Nine Weeks to Better Options Trading series, but the game is far from over. Over the past eight weeks, I've addressed not only introductory-type concepts like option pricing and behavior and risk management, but also some key basic and not-so-basic options trading strategies.

Unlike many option primers, which tend to start their focus on the innards of options math, my approach is to provide instruction on how they work in the real world. The analogy would be that we don't need to know how to build an engine in order to drive. But to travel safely and efficiently, it certainly helps to have instruction in how the vehicle operates under different conditions. Hopefully, we now have a basic operating manual that will not only get us from point A to point B, but also teaches us what do when presented with adverse or unexpected conditions.

In today's piece, we're going to look at what are generally called "special situations," or events, both known and unknown, that can have a large impact on a stock's price, and how we can use options to predict and ultimately profit from the outcome. I want to look at three areas -- mergers and acquisitions, earnings reports, and extreme moves. The first two categories would fall under predictive plays -- that is, you take action before an expected event. The third would be considered reactive in that you respond after the fact.

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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