Option Investor
Educational Article

The Effect of News on the Option Trader

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The power of the news media is a phenomenon whose influence must be taken seriously. The news whether good or bad, true or false, possible or probable can have impacting results on your option transactions. Unfortunately, some of these news worthy events have negative results as well as positive results. The irony is, that no matter how negatively a news event impacts a trader; there is always a trader on the other side of the transaction that becomes the beneficiary of that trade. I guess you might say things balance out in the long run, except when the events are unforeseeable or come about suddenly.

News effects option prices

The impact of news on an option trader is almost immediate in most cases. It can take an almost guaranteed winning trade and make it at best a breakeven or in a lot of situations a losing transaction. News can take a sure losing trade and make it a breakeven trade or even a winning one. The impact of news events plays no favorites. Its just a matter of what side of the market you are on as an option trader, when these news events happen.


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News events can affect option prices almost daily

The thing about news events that are so frustrating is that they can and do appear almost daily. It could be an announcement from the underlying stock that you are long or short in; and depending on what the nature of the news announcement is can affect the underlying stock positively or negatively or even after traders ponder its impact, have no impact on the underlying security. However, whether good or bad news to the underlying company, it will always affect your option in the same way. If you think about it, every second that you are invested in the market you are subjected to the whims of a news announcement that might effect your stock, positively or negatively. This occurs every day that you are in the market and potentially at anytime during the day.

News events can affect options prices fundamentally.

Not only can news affect you option positions daily, but the can cause fundamental affects to the underlying stocks long term performance that will affect your options. Some examples:

1. Earnings Reports (good, bad, indifferences, meeting street expectations or not)
2. Mergers, acquisitions involving the underlying stock of your option or a company indirectly or directly affecting the sector of the economy that your underlying stock is involved in.
3. Regulatory announcements (halts in trading, auditing or restatement of financials of the underlying company.
4. Changes in management. (CEO leaving, new president elected, etc.)
5. Environmental issues (fines, etc.)
6. Labor and Employment issues (strikes, layoffs)
7. Government announcements (job numbers, inflation rate, housing starts, federal deficit numbers, commodity prices.)
8. Acts of God (floods, hurricanes, earthquakes, etc)
9. Political events (elections, declarations of war, etc)
10. Unforeseeable events of various natures.

New events can affect option prices technically

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