Many traders know that options strategies provide an abundance of choices. But is it possible to construct an options trading strategy that will hedge against bad news—whether expected or unexpected? The answer is yes and no. Let’s explore.
Known events or unknown eventsIn the markets as in life, there are often “known unknowns” and “unknown unknowns.” Sometimes, we know when an event is going to occur; we just don’t know what the result will be. Examples of these “known unknowns” are:
• Earnings reports
• Drug trial results or FDA panel reviews
• Economic reports
• Monetary policy decisions
• Election results
Other times, we don’t know what will occur, when it will occur, or even if it will occur. These unknown unknowns are sometimes called “Black Swan Events,” and they include:
• Merger and acquisition announcements
• Terrorist attacks
• Exchange malfunctions (i.e. Flash...
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