Best ways to trade off news?
Was thinking of starting to follow research blogs, see if I can be on top of the 1950’s equivalent of “cigarettes are bad for you” research report.
Historically, reactions to binary events are just as random as whatever underlying (earnings, oil inventories, etc.), be it in direction and subsequent volatility. Systematically, there’s not much there imo, meaning I wouldn’t spend too much time worrying about how the market will react to certain info.
That said, given the frequency of events and potential levels of large absolute volatility following such events it makes sense to tightly bracket price and hope for a big move.
As for finding these, just look at a calendar and find out when important news/reports are going to be released.
One way to gauge the magnitude of an impending
significant event is to look at how much the nearest
expiry at the money straddle is priced at.
Helps you get a feel of what the marketmakers
are willing to take your orders at.
Lockheed, I feel like you’re lightyears ahead of me bro. I’ve covered the majority of level 1 stuff, and still dont get half the stuff you say. Is this difference coming from level II material? I feel like level one covers a lot of base level undergrad level stuff (with some obvious above and beyond portions) but I still dont get what a lot of you guys say. Depressing.
CFA is about investing and analyzing securities. Trading off news is nothing like investing. I have seen 1 hedge fund that makes this work and even then value investors can easily outperform them and the hedge fund takes signifcantly more leverage than value investors.
Also if your trading short-term be aware due to tax reasons your return has to be higher than long-term investors to be worth it. Academics and CFA would advise against trading. By long-term I mean greater than 1 yr holding period.
Lockheed: Are you a trader? What is your annual return if you dont mind me asking?
The only trading which made sense to me is option trading from tasty trade. They basically trade based off of probabilities in the money and what not for options with high volatility. Probabilities are dynamic and not static. Their strategy revolves around mean revision of volatility. If this makes 50% annualized return then I would follow since transaction and taxes would eat up a good percentage of your gain.
I’ve seen you ask this in another thread, so I hope you don’t mind getting my opinion. I rarely work with options, but I’ve finished all 3 exams.
In L1 you mostly got how options work. The basic strategies and their payoffs.
In L2 you’ll find a more stuff on how they’re valued. You’ll learn stuff like how the intrinsic value of the option is affected by changes in price of underlying, strike price, volatility, time and interest rates (the greek letters people refer to all the time usually referring to how a factor affects the intrinsic value of the option).
In L3 you’ll get more into strategies. So you’ll learn a few strategies (like straddles, butterflies, spreads, etc…) and their payoffs. If I’m not mistaken, you did this already for covered calls and protective puts, so you’ll do the same thing for other strats.
I’m pretty sure that you can understand most or all AF option threads by learning well the CFA material, and be mostly comfortable when talking about options for the most part.
Of course, the depth of options trading can go way beyond that, and you may dig into it if you want to be an options trader or simply learn more about it.
BTW, a long straddle is when you buy both a put and a call. So you pay a bigger premium, but you may win if the stock go up enough or if the stock goes down enough. Basically, you’re rooting for volatility.
Hypothetical Example: There’s a McDonald’s trial coming up. The market expects them to pay 500 million in reparations because their burgers don’t have “you may get fat” written in their boxes. If the judge make them pay zero, the stock goes up and you make money on the call. If the judge makes them pay a billion, the stock goes down and you make money on the put. If they pay something close to 500 million, the stock may not move much and you’ll waste most of your premiums.
I’d say, it’s good to have the academic/theoretical understanding of option pricing/value as a foundation, but at least for me, it was about constant exposure to the markets for almost 15 years… the first 8-10 years were composed of brutal lessons.
And the CFA material for the most part, will not at all have any help to one’s ‘trading’ progress. Really good consistent traders with longevity of alpha/profits do not have a CFA. Most of them would not even be able to pass Level I. (and they wouldn’t even bother too attempt it, because they don’t have too).
Best is the initial euphoria AFTER the news is released.