The stock market tends to be a discounting mechanism. Traders and investors are not only going by what is, but what they expect. Mark Hulbert wrote about the impact of a CEO's death, and more pointedly about Apple and Steve Jobs (link).
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the stock market does an impressive job of discounting the consequences of developments that are coming down the pike. So when a CEO’s health is as fragile as Steve Jobs’, and when that fact is as widely known as is the case among Apple’s investors, the negative impact of his passing will — at least for the most part — have long since been reflected in the price of the company’s stock.
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The game within the game is whether the news is fully discounted, usually it is not and there is a reaction on the news. However, as Hulbert's research points out, that reaction is often an over reaction. Readers know I sometimes like to buy stocks that are having headline making bad news (eg: Toyota when it was having all its recall problems.) I am also fond of buying on good earnings news and a decent looking chart, and buying ETFs on strength rather than weakness.
Changing the topic, on the Friday ThinkorSwim market wrap (anyone can listen, they just have to register at the website, highly recommended), a bearish calendar spread was mentioned. I never have done calendar spreads, and never quite understood the play. On Friday it was like lightbulb went off and I am coming to a much better understanding of when a person might use calendar spreads.
The basics are buying one option a few months out, and selling the same strike closer in. The buyer of the calendar spread profits if the market is near the strike price at the first expiration. A big move either way means a loss. In theory, downside and margin requirements are limited to the price of the spread. What can wreck that is if there is fast market and an early exercise on the short option.
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