Event-Driven Catalyst Trading

It depends on your goal. Exit before to capture IV expansion without binary event risk. Hold through if you have strong directional conviction and are willing to accept binary outcome. Beginners should often exit before.

The expected move is the market's estimate of how much a stock will move. Find it by adding the ATM call and put prices (straddle price). If ATM call is $5 and put is $4, expected move is ~$9.

IV crush. After an event, IV drops sharply. If your option's value from IV (vega) drops more than it gains from direction (delta), you lose money. You need a move larger than expected to overcome IV crush.

Start with post-earnings fade trades (after the announcement) to avoid pre-event complexity. Or watch several earnings cycles on paper before trading. Avoid biotech binary events and M&A situations initially.

Less than normal trades. Risk 1-2% of account maximum per event trade, compared to 2-3% for normal trades. Binary outcomes justify smaller positions.

Compare the current expected move (straddle price as %) to historical average moves for that stock's earnings. If historical avg is 10% and current straddle implies 7%, it's potentially cheap.

Focus on rate-sensitive sectors: banks (XFN), REITs (XRE), utilities (XUT). If expecting a surprise, take directional positions. If expecting as-expected, consider selling premium on these sectors.

Have a plan before the event. If outcome is unclear post-event, either follow your original plan or exit to preserve capital. Don't hold hoping for clarification if you didn't plan for ambiguity.

Target stocks have more predictable behavior (move toward deal price). Acquirers are harder to trade (mixed reactions). Merger arb focuses on targets. Acquirer shorts are risky.

Events in one stock can move the sector. Bank earnings from RY can move TD, BMO, etc. Use this for: 1) Avoiding correlated positions, 2) Trading sector ETFs for broader exposure, 3) Pairs trades.

Estimate post-event IV (typically 30-50% lower). Recalculate option values at that IV. The stock must move enough that the new intrinsic value exceeds original premium paid. Generally need 1.2-1.5x expected move.

Earnings: straddles, butterflies, calendar spreads. Binary regulatory: defined-risk directional (verticals). M&A: risk reversals, conversion/reversal for arb. Macro: sector ETF options, rate-sensitive pairs.

Build database of: event type, expected move, actual move, IV before/after, strategy used, P&L. Analyze patterns: which event types win most, which strategies work, where edge exists. Iterate based on data.

Widen bid-ask assumptions in P&L calculations. Use more liquid underlyings (big 5 banks, XIU, SHOP). Consider stock-based strategies instead of options if spreads too wide. Be patient with limit orders.

Whisper numbers (unofficial estimates) can differ from consensus and drive reactions. Alternative data (credit card spending, web traffic) provides edge on fundamentals. Use cautiously - adds complexity and cost.