As you might have noticed, we stress how valuable trading the news can be quite often on our blog. There’s a reason for this. The news has a profound impact on short term price movement. For options traders, a huge number of opportunities can occur through the news. But just like any other trading strategy, there are issues that arise when you are attempting to trade on news events. In fact, although this is a strategy that is often passed as one for beginners with little to zero trading experience, if you want to avoid losing money while using this strategy, experience is a must.
Take a recent example that came from Disney. Disney is one of the world’s largest and most recognized corporations. They are also a favorite underlying asset for those that trade in the options market. Stocks don’t receive a lot of love here, but Disney is one of the stocks that receives attention.
According to a recent announcement from Disney, they have agreed to pay $3.8 million in back wages to hotel and resort employees. The company had been being investigated by the U.S. Department of Labor, and there were allegations that the company had violated the law in terms of recordkeeping when it comes to wages. This ends up being more than $200 per employee affected, but in the grand scheme, $3.8 million is not a large blow to Disney. In fact, while this might devastate a smaller company, Disney’s stock price still increased throughout the day after a dip early on Friday, March 17th, despite the fact that this announcement was the biggest and most heavily publicized of the trading day for the company. It ended up 0.04 percent for the day. It wasn’t a huge difference, but it was not the change that some expected.
Traders that had attempted to go short or to trade a blind series of put options on the company in light of this news would have lost money.
This is a very important concept for options traders to keep in mind. Because while trading the news is very powerful and profitable, it isn’t always so. Sometimes news might seem like it should have an impact, but it doesn’t. As we look for profitable short term opportunities, we need to remember that not all news is equal. And just because the news may seem like it has a positive or negative impact does not mean that it will have an impact at all. A ruling (or action, as in this case) against a large company should lower the company’s stock price. After all, losing millions of dollars unexpectedly all at once is a big deal. But Disney is a large enough and profitable enough company that this negative occurrence didn’t have the impact that some traders expected.
And this makes sense once you look at it in a little more depth. This is where knowledge of other aspects of trading will be beneficial to you. If you take a look at Disney’s balance sheet, you can see that Disney has over $91 billion in assets, including more than $3.7 billion in cash. While $3.8 million seems like a large amount, it is actually a tiny drop of what Disney holds. It is not enough to make an impact on the company’s overall worth, at least not by itself. For a trader to really get the full benefits of using the news, an understanding of not just how the news might impact a company is needed, but also an understanding of fundamental analysis. This knowledge base will help you to be a better trader.