HAVE YOU HEARD THE NEWS?
By: Dale A. Zamzow
How would you feel about a strategy that allowed you and your wife to retire
within a few months? What about one that has proven its effectiveness again and again?
Most would probably list it as a favorite strategy – one that merited refinement,
consistent use, and even the pleasure of sharing it with others. This is what I have done
as I have been rewarded by trading the news. It is a strategy that has evolved and
changed in flavor over the course of my trading career, yet remains rewarding.
After teaching school for 29 years, I found that I was looking for something that
would allow me to reach my goals. I wanted my wife of 30 years to be able to retire, to
be able to retire myself, and to be able to do more for my children, church and
community. I attended my first stock market seminar in September of 1998. Before that
time I had not traded stocks; in fact, the only investment even related to the stock market
was my 403b retirement plan that was invested in a mutual fund. At my seminar I was
exposed to the idea of trading the news. The idea intrigued me. I spent time practicing,
and then began trading the news. Within three months I had replaced both of our salaries.
My wife was able to retire after more than 20 years of teaching school and do some of the
volunteer work that had been impossible for her to do before.
There are three factors to be considered as moving the price of a stock:
fundamentals, technicals and news. News tends to override the others in the short term
and provides us with an opportunity to play the stock in either a bullish or bearish move.
News received in a timely fashion allowed me to enter a trade before other traders were
aware of the news, their later entry carried me to a profit. Simply buying a call on a
bullish piece of news or buying a put on a bearish announcement allowed me to profit
from the price move of the stock as others entered the trade. I still remember my first
trade on Starbucks Coffee.
SBUX: Starbucks Corporation (Daily bars)
Graphed by the 'Chart Navigator' -- www.GFDS.com
12/22/98 = 12.73 (-0.45)
13.00
12.00
11.00
10.00
9.00
8.00
News is anounced
Aug-98
Sep-98
Oct-98
Nov-98
Dec-98
That trade and the others that followed not only brought me a profit but also taught me to
be a better news trader. (Be careful to practice this strategy and get good at recognizing
the type of news that will move stocks in a predictable way.)
In 1998 I would stay in the news trade for two to four days. I would set my target
price for my exit $1 to $3 above my entry point, and I was too cavalier to regularly set
my exit for a stop loss. Could I trade the same way today? No way. The market has
definitely changed over the past three years and my news trading has had to evolve with
the changing market. Now more people can receive the news faster and more completely
than before, plus their alerts and quotes can follow them as they move through the day.
By using the resources available at The Dedicated Trader website you can see the news
and select your trade. That is an awesome change that will bring more traders into the
news-trading arena. The more educated traders we have trading this strategy, the better
the trading will be. Educated traders trade the market in a systematic and predictable way
that makes it easier for us to see the trend and trade it.
As with any strategy it is necessary to practice trading the news. There are rules
to follow, which will help in developing your skills. Begin by making a list each day of
the news items available on the TDT website: upgrades, downgrades, earnings, etc. As
the news comes in, decide if you consider the news to be bullish or bearish in nature. If it
is bullish, buy a call and set your target for a profit at $.50. If it is bearish, buy a put and
set the same profit target. Remember that a $.50 profit with 10 contracts will yield a
$500 profit. As you practice, notice if the news items are behaving as you predicted. For
example, a news states ” Starbucks Coffee (SBUX) expects profits for the coming year to
increase by 200%. Stock is currently at $21.88.” This being a bullish announcement,
indicate on paper your prediction that Starbucks will go up and you will buy a call at least
one strike price in the money. Later in the day, check to see if indeed Starbucks goes up.
If after the announcement Starbucks reaches a high of $25.10, you have made your $.50
on that move.
Before The Market Opens
On most days a number of news announcements provide an opportunity to get
into a trade with the possibility of making fifty cents. Some of these announcements
arrive pre-market beginning about 8:45 a.m. EST. These pre-market announcements
provide time for a little analysis before the market opens. They will include earnings
announcements, upgrades, downgrades, new coverage, earnings warnings, sector moves,
stock splits, market futures, and more. List them and decide which are bullish in nature
and which are bearish. Make two columns: one for bullish news and one for bearish
news. As the announcements arrive, place the ticker symbol under the appropriate
column and make a note of the type of news it is (bullish or bearish). Before the market
opens, look at the chart of each stock and check the other factors such as fundamentals
and recent news. News items arriving before 9:30 a.m., are the post- market and premarket announcements and allow you the luxury of time to analyze the chart of the stock.
To be ready for the market day no matter which way the market is trending, list stocks
that include bullish candidates as well as bearish candidates. This gives your list of
candidates to consider and analyze before the market opens.
As you look at the chart for each stock candidate you want to consider the
following questions:
1. Is the stock optionable? Since we are going to be buying calls or puts, we
need optionable stocks.
2. Has the stock already traded into the news in the direction you expect it to go?
In other words, if you thought the news would move the stock in a bullish
direction, has it been moving bullish for 2 or 3 days already? If it has, perhaps
other traders or insiders already anticipated the news.
3. Does the stock have room to trade in the anticipated direction before reaching
a major trendline? I look to make sure the stock price can move at least $2.50
in the appropriate direction before bumping into a major trendline (support,
resistance, moving average, etc.).
4. Is the sector for that stock showing strength in the same direction? Find out if
other stocks in that sector are also moving in the same way (bullish, bearish)
5. Is the market moving in the same direction that you want the stock to move?
Don’t try to go against the flow.
6. Is the spread between the bid and the ask for the option on that stock less than
$.50? If the spread is larger than $.50 you may have a difficult time getting
you profit out of the trade.
7. Does the stock have an average daily volume greater than 250,000?
After you have answered the questions above and have picked both your bullish and
bearish candidates, then it is time to watch the market as it opens and determine the trend
for the day and how to play it. Consider the typical morning on the NASDAQ. The
market opens at 9:30 a.m. East Coast Time and you probably remember, the first part of
the day is called amateur hour. Here is how the normal morning on the NASDAQ
progresses:
1) 9:30 – 9:50
amateur hour
2) 9:50 – 10:00
first reversal
3) 10:00 – 10:10
second reversal
The times above can shift 10 or 15 minutes either direction, and remember that news will
override any normal market day. In general this happens in a fairly predictable manor
during the normal trading day on the NASDAQ and similarly on the NYSE. Realizing
this, plan your entry point for your news trade based on the normal movement of the
market.
Many students ask how they can trade a news item that has already been
announced pre-market and has caused the stock to gap at the open. Look at the time
schedule for the trading day. Notice that the first and second reversals may give you the
opportunity to get into the trade. If the stock has gapped open and traded up on the
positive news, there will be traders that will now take their profits out of the trade and
when they do, cause the first reversal. As the stock trends back down, traders who have
been waiting for the pullback begin to enter the trade and the second reversal occurs. As
the trend reverses back to the original direction, it is possible to enter the trade, buying a
call option if bullish or buying a put option if bearish. Remember, these are short-term
trades; therefore buy options that are in the money and at least 1 month out. Our profit
target is fifty cents.
It is important to remember the basic rules for trading short-term options.
Buy in the money calls (one or two strike prices), open interest must be more than 100,
the delta should be .70 or higher, and the option should be fairly priced. Enter the trade
by purchasing 3 or more contracts and remember to place a stop loss alarm and a g.t.c. to
get out of the trade with a fifty cent profit. Using the alerts that are available on the Real
Time Markets section of the website, I am able to set my stop loss alarm as an alert that is
sent to my cell phone or computer. This allows me to monitor my positions and take
action if necessary.
To summarize and clarify, as the news arrives pre-market:
1.
Have your paper ready to list the stock ticker symbols under the
bullish, or bearish columns.
2.
If you are not sure how to catalog the news on that stock, put it
in a neutral column.
3.
Begin to analyze the charts for each of the ticker symbols using
the considerations listed earlier in this article.
4.
If the stock meets your criteria, circle the ticker symbol so that
you can make a short list of candidates to watch as the market
opens.
5.
Finish your list of candidates and then transfer the circled
symbols to another list ; again one list bullish, one list bearish.
6.
The closing price of the S & P futures is available about 9:15
EST. Use this information as a gauge to help you determine the
potential opening move of the market. S & P closing number
multiplied time 8 gives you the approximate move of the DOW
as it opens.
7.
Track the market as it opens and determine if the day is
beginning bullish or bearish.
8.
Select the proper list of symbols for the day and begin to follow
the price flow of those stocks, noting their price and whether
they are up or down on the day and compare that to the way the
DOW and NASDAQ are moving. You are looking for
candidates that are flowing with the market.
9.
As you see the markets come out of the 1st reversal and begin
the 2nd reversal, select those stocks that meet you rules and are
moving with the market. Enter the trade on that stock and set
your G.T.C. to collect fifty cents.
If you have several candidates that meet your criteria, select the top one or two.
If you do not find a good candidate, don’t try to force the trade. Wait and trade another
day. Above all, be sure you have paper traded this strategy and practiced so that you can
move fluidly through the process.
On Jan. 23, 2002 in a seminar, we practice traded the news on AMGN. Analysis
of the chart showed us that the stock met our criteria. The reversal occurred as we
thought it would and AMGN was moving with the market. AMGN was priced at $56.95.
The option that we picked was the February $50 call, priced at $7.70. We did 10
contracts and set our G.T.C. at $8.20. We were taken out of the trade using our G.T.C.
after about 45 minutes.
AMGN: Amgen Inc. (Daily bars)
Graphed by the 'Chart Navigator' -- www.GFDS.com
4/15/02 = 56.85 (-0.36)
63.00
62.00
61.00
60.00
59.00
January 23
58.00
57.00
56.00
55.00
54.00
Jan-02
Feb-02
Mar-02
Apr-02
Each day will present a new set of candidates, a new market to look at and the
possibility of making fifty cents on one or two news trades. I will let you do the
calculation to figure the annual return if you do 3 or 4 news trades each week. As the
trading day continues other news will reach us and these news items will be handled a
little differently.
NEWS: MINUS FIFTEEN AND COUNTING
The market is now open and the flow of news continues. You will see and hear
useful announcements throughout the trading day such as rumors, stock splits, analyst
meetings, new products, earnings predictions, contracts or loss of contracts, approval for
new drugs, and many others. This type of news flows continuously throughout the day in
Real Time Markets. Included with these announcements are market updates and a list of
the most active stocks. After receiving the announcement, react by either trading the
news or waiting. One of the most important uses of this type of information is to keep
you focused on the market. The market movements reflected these announcements will
be invaluable as it keeps you aware of the trend of the day and the sectors that may be
moving with the trend.
The news that comes in pre-market allows you the time to analyze charts and
make decisions based on the market as it opens for the day. News arriving after the
market is already open is extremely time sensitive and must be acted on immediately.
Quick decisions are imperative as you have only fifteen minutes or less to make a
decision whether or not to enter the trade. When trading the stock market, news gives
you practice in making those quick decisions. You must be practiced to be ready to take
advantage of this type of trading. When I began trading the news I practiced by making
an immediate decision about each news announcement and writing down my course of
action. For example, news is received that Sunglass Hut (RAYS) is going to be
purchased for $11.40 a share by another company. RAYS is currently trading at $8.64.
Be aware that the stock is going to go to its purchase price and decide on your course of
action. Buy a call option or buy the stock. Record the fact that you are bullish on the
news and would play it accordingly. At the end of the day check the movement of the
stock to determine if the price has moved enough to be profitable. Each news item should
be treated in the same way. Read the item, decide if it is bullish or bearish news, select
the type of trade you would do and then write it down. Later in the day check the
movement of the stock to see if it has gone in the anticipated direction. Remember at the
Market Essentials workshop you learned that you practice a trading strategy before using
real money to trade that strategy. News is not an exception to this rule; you must practice
and understand how the news is traded before attempting to place an actual trade.
I remember my first news trade. I was teaching school and the announcement
was made that Starbucks Corp. (SBUX) expected profits for the coming year to be 200%
higher than last year. Realizing this was bullish news, I called my broker and asked what
he thought about the news on Starbucks. His reply: “What news?” My broker was not
aware of the news even though he had the financial networks active on his computer. I
then asked him if the stock had moved yet on the news. He told me that it was only up
about $.25. Since my broker was not aware of the news and the stock had not yet moved
on the news, I felt secure in entering the trade. Two days later I exited the trade with a
profit of $2.10 per share; that is $2100 on ten contracts. I followed that trade with many
others over the next few months and was able to replace and exceed my wife’s and my
normal yearly income from teaching in just three months. News trading became my chief
strategy.
Realize the importance of having information available to you before you enter
the news trade. News will override the current trend but it is necessary to be able to see if
the stock is already reacting to the news. Confirm with your broker or on your own
computer that the stock has not yet begun to react to the news. When you receive the
news announcement and intend to place a trade, answer these questions:
1. Is the announcement bullish or bearish? (You need to know how you intend
to play this announcement.)
2. Has the stock already moved significantly? (If it has then stay out of the
trade.)
3. Did it move yesterday in the expected direction as if somebody already knew
the news? (If so, stay out of the trade.)
4. Is the market moving in the same direction that you expect the stock to go?
(Don’t go against the flow of the market.)
5. Does the stock trade at least 250,000 shares on average each day? (Make sure
that there is plenty of average volume before you enter the trade.)
When you know the answers to these questions, you can make a decision whether or not
to enter a trade. If the stock has already moved significantly either yesterday or today,
then stay out of the trade. If the market is moving opposite the direction you want the
stock to go, stay out of the trade.
Once you have decided to enter the trade, select the call option that is one or two
strike prices in the money. The option must have a high delta and plenty of open interest.
The delta should be at least .70 and the open interest should be over 100. Check to see
that the option is fairly priced. If it is fairly priced, the time value of the premium will be
less than the intrinsic value. Set your exit for a profit of fifty cents and don’t forget to set
a stop loss to protect yourself in case the stock moves against you. Do not be greedy.
Keep your profit to fifty cents.
You should be aware by now that it is extremely important to be able to check the
current move of the stock price when become aware of a news announcement. If you are
not at your computer, you must be able to talk to a broker and ask the questions that will
help you qualify the trade. If you have the availability of receiving news and updates on
your phone, you can trade the news from almost anywhere. News trading is a portable
trading strategy, which frees you from being tied to your computer.
News trading encompasses news that arrives pre-market and during market time.
Pre-market news allows you to look at the technicals and identify your entry point based
on support and resistance, the move of the stock price over the last few days and the
general market trend. It also gives you the opportunity to see the market open and the
trend develop so that you pick a stock moving with the market. Proper timing involves
watching for the morning reversal that allows you to enter the trade as the stock reverses
from profit taking and resumes its original direction. News arriving after the market is
open has to be dealt with immediately and decisively. Judge the news as to content based
on your experience paper trading the news. After answering the proper questions about
the stock and its movement, enter the trade.
Bullish news means you will enter the trade by either buying a call option or
buying the stock. To trade bearish news, buy a put. You will be in the trade for only a
short period of time (less than twenty-four hours). Since this is a short-term trade you
will be buying an option that is one or two strike prices in the money and at least one
month out. Check to be sure that the option is priced fairly. If time allows, ask your
broker for the fair value of the option or be sure that you are never paying too much for
time (time value should be less than intrinsic value). Set your exits: fifty cents profit,
stop loss protection. Let the news bring you the profits.
Here are a few examples of news trades that I have done:
1. 10/24/01: Bullish news on EMC. Stock trading at $12.40, bought 10
contracts of the November 10 call for $2.70. Sold 10 contracts on 10/25/01
for $3.20
EMC: Emc Corp (Daily bars)
Graphed by the 'Chart Navigator' -- www.GFDS.com
10/29/01 = 12.95 (-0.46)
22.50
20.00
17.50
15.00
October 24
12.50
10.00
Aug-01
Sep-01
Oct-01
2. 10/23/01: Bullish news on DELL. Stock trading at $24.45, bought 10
contracts of the November 22.5 calls for $4.20. Sold 10 contracts the same
next day.
DELL: Dell Computer Corporation (Daily bars)
Graphed by the 'Chart Navigator' -- www.GFDS.com
12/10/01 = 28.91 (-0.03)
30.00
27.50
October 23
25.00
22.50
20.00
17.50
Oct-01
Nov-01
Dec-01
3. 10/23/01: Bullish news on GENZ. Stock trading at $52, bought 10 contracts
of the November 50 calls for $4.50. Sold for $7.30 on 10/25/01.
GENZ: Genzyme General (Daily bars)
Graphed by the 'Chart Navigator' -- www.GFDS.com
12/10/01 = 57.86 (-0.65) 60.00
57.50
55.00
October 23
52.50
50.00
47.50
45.00
42.50
Oct-01
Nov-01
Dec-01
4. 10/29/01: Bullish news on GSTRF, no options available. Bought 10,000
shares for $.75. Sold them within 1 hour for $1.00.
5. 11/2/01: Bullish news on BRCM. Stock trading at $38, bought 10 contracts
of the November 30 calls for $10.50. Sold 10 contracts on 11/5/01 for $11.00.
BRCM: Broadcom Corporation (Daily bars)
Graphed by the 'Chart Navigator' -- www.GFDS.com
11/26/01 = 49.99 (+3.54)
50.00
45.00
Nov 2
40.00
35.00
30.00
25.00
20.00
Sep-01
Oct-01
Nov-01
6. 11/2/01: Bullish news on AMAT. Stock trading at $37.63, bought 10
contracts of the December 32.50 calls for $7.10. Sold 10 contracts on 11/5/01
for $7.60.
AMAT: Applied Materials, Inc. (Daily bars)
Graphed by the 'Chart Navigator' -- www.GFDS.com
11/26/01 = 20.03 (+0.65)
22.00
Nov 2
21.00
20.00
19.00
18.00
17.00
16.00
15.00
14.00
Sep-01
Oct-01
Nov-01
Real Time Markets has the alerts available, moving market news on The Dedicated
Trader site and your ability to quickly analyze and decide on a course of action will be a
tools that if properly used can bring you a regular fifty cent profit ($500 on ten contracts)
on your news trades. Practice to build up speed in your decision-making. Practice to
learn the type of news that causes stocks to react in a predictable way. Practice to
develop the ability to see the trend quickly and take advantage of it. Use the information
to keep focused on the market and become a better trader.