9 Weeks to Better Options Trading: Special Situations: Earnings Reports, Takeovers, and Extreme Market Moves
Veteran options trader Steve Smith breaks down special situations.
Editor's note: To help investors profitably navigate the options market, Minyanville has launched "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 Steve Smith will demystify a range of topics from options pricing to trading strategies to special situations like earnings reports and takeovers. Read the kick-off to the series here.
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.
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