BACK TO BASICS: Evaluating Company News for Explosive Opportunities

By Jeff Neal, Optionetics.com
12/5/2005 8:45:00 AM


When a specific company or firm is generating good or bad news in the financial press, it can often lead to very explosive opportunities. For instance, shareholders can experience gigantic losses when a particular stock plummets in value due to negative news. When this happens many times it presents a possible low-risk buying opportunity using call options. These opportunities can often double your investment in a day or week, and these wild swings happen virtually all the time in the market.

One way to spot these super trading opportunities is to pay close attention to companies reporting bad earnings, or news from a company that the earnings will not be as expected. Even though it is true that a company's share value is impacted by many factors, the fact is that the most significant factor is expected future earnings figure as forecasted by brokerage company analysts. For example, if a company starts to provide these analysts with any information that is viewed as adversely impacting a company's next earnings release, then they will quickly down their forecasts, which can lead to massive selling.

One thing about the trading business is that usually reactions are very similar in extreme situations. A savvy trader will be very motivated to react to this situation and develop a trade that will profit from this scenario. Some things that can be done, for instance, would be to buy out-of-the-money calls and out-of-the-money puts at a cheap enough price so that there is very little risk and enough time to generate profits.

In addition, traders viewing the news for explosive opportunities should watch for new product developments, especially in the hi-tech areas. Big moves are often started when pharmaceutical companies and biotech research and development companies announce successful trials of new drugs and approvals from the Food and Drug Administration. This a terrific area for traders to watch closely when choosing trades.

Also, traders should watch the financial news to locate price increases or decreases of more than 20 percent in the past 60 days or price increases or decreases of more than 30 percent since yesterday. The reason for this is that momentum creates opportunities for both buying and selling. When the momentum is strengthening or weakening these are often the best short-term opportunities and they often create longer-term opportunities.

Another important piece of information is when shares are reaching new highs or coming off new lows. When used in combination with lists of price percentage gainers and losers this can be a very powerful momentum indicator. For example, when a stock is on one of the gainers lists and it's making a new 52-week, then it could possibly be a very good buy. In addition, when the stock has made new lows and is coming off new lows, then this could very well indicate that a bottom is now in place. All of these news events concerning a company's stock are extremely important for momentum traders to monitor closely and then be prepared to capitalize on this news.

Happy Trading.


Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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