Spread Betting on Corporate Updates and Trading Statements
You may have noticed that prices often gap up or down when news comes out overnight or is announced just before the market opens.
Some news comes completely out of the blue, you can’t predict it and therefore you can’t avoid it — except by closing your outstanding positions at the end of each and every day as a ‘day trader’ would. Some news you can predict, because companies issue trading updates at well-publicised times. So if you know that a company will be announcing a set of results first thing tomorrow morning, you might be wise not to hold a short or long position in that particular stock until the news has been absorbed into the price after the first hour or so of trading.
Obviously if you did have a spread bet open on the particular equity prior to the trading update, and if the price reacted the right way, you’d be a hero compared with the guy who opted for the safety of closing his position in advance of the update. But there are two problems with the gung-ho approach:
- Unless you have inside knowledge, you really don’t know whether the figures will come out good or bad until somebody else knows.
- You can’t be sure that good news will send the price up and bad news will send it down.
On the first point, as a ‘retail’ trader you should assume that someone will get the news quicker than you will, and — even if they don’t — will be able to react to it quicker than you will. The price will be down (we assume) on bad news before you even know what the bad news is, and it may well embark on a reverse trajectory (i.e. upwards) just as you establish your “bad news” short position.
On the second point, the price may not have fallen at all on the bad news because it the news wasn’t as bad as the ‘analysts’ were expecting. Conversely, some good news might not be as good as the analysts were expecting, so the not-so-good good news will actually send the price down.
I once read a book in which the author commented wryly about the efficacy (or otherwise) of analysts forecasts. In our topsy-turvy world the analysts are assumed to be ‘right’, and a company is punished for getting its results ‘wrong’. Doesn’t anyone stop to think that by definition the company results must be right and it is the analysts who lead us to the wrong conclusions by being wrong in their predictions?
Trading the trading updates, therefore, is impossible. Or is it?
While it may not be possible to predict what news a trading update will deliver, or how the price will react to it, it may just be possible to react to the price reaction. If a price gaps up or down by 20% on a trading update, at least you can get in at a 20% better price that those who were holding positions just before the announcement. Your newly-established contrarian position might benefit from a closure of the gap, and your tight protective stop order is unlikely to be gapped-through during the subsequent trading hours. It may stop out in orderly fashion, but that’s alright.
Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.