If you’ve never tried to trade the news, or you have doubts about how effective it can be, take a look at a recent example that occurred with the company Under Armour. The company is not huge, but they do have a commanding presence in the athletic apparel sector, and when their CFO and COO, Brad Dickerson, announced on Tuesday, October 13th, that he would be stepping down sometime in February of next year, the shares of Under Armour dropped quickly. Over the course of the day, shares ended up dropping by about 2 percent because of this event.
This is not a huge piece of news. Executives leave companies all of the time. And while Dickerson does play a big role at Under Armour, this is not an event that will devastate the company if they act accordingly after his departure, especially if he assists in the transition as he has stated he will.
The main point of this is that news does have an impact. It’s not always as noticeable as it was with Under Armour, but this is why binary options are such a perfect tool for trading the news. When news happens, you need to quickly evaluate how that news will affect prices. For something like a major figure in the company leaving, the affect is almost always a negative one, for example. Good news happens often, too. If a company were to announce that they are expecting record earnings over the next 12 months, that would likely drive prices upward. If you are in doubt, you can always wait and see how the market responds, but this could infringe upon your ability to get into the position on time. However, it is always better to sit out a trade than to lose money on it.
When you trade the news, you need to act fast. Cases like Under Armour do not always last the course of a trading day. Sometimes, news happens, prices are noticeably affected for an hour or two, and then the company evens out its price again. You need to beware of this and ensure that not only are you receiving relevant pieces of news as soon as possible, but also that you are able to act upon that news quickly, too. Some traders use mobile apps so that they are always able to execute trades if they look lucrative, even if they are out of the house for a bit.
If you were trading the Under Armour price drop, you can’t expect this drop to keep going for a prolonged period of time, but you can expect a resurgence of it in certain situations. It’s not likely that shares will drop steadily between now and February. However, if Dickerson leaves his post before February for some unexpected reason, you can bet that the price will once again drop. Yes, shares have already responded to the news, but that doesn’t mean that the emotional response to it will just end. Traders don’t always act rationally, and you can profit from this.
Market rationality is a big part of how you should approach your trades. Under Armour’s price dropped far more than it should have on this news. If the market efficiency theory is correct, and the company truly is worth more than what it’s now priced at as most experts believe, that means the long term prognosis for Under Armour is that prices will go back up soon. Your short term trades can reflect dropping prices, but now that they’ve dropped, traders should respond by going long with call options, rather than anticipating long term price drops.