What is the first step (and often last) for the new daytrader? Turn on CNBC and wait for the news, of course (don?t deny it, you have been there). Then when you hear the late breaking ?real time? news, you buy good news (or sell short bad news) in an attempt to beat the other 8 million listeners. Sound like a winning plan?

After realizing that is kind of hit or miss, you decide to fire up the ?real? real time news service. Of course, at this point, it hasn?t dawned on you. It is not just the fact that you are not really ?beating? anyone to the news. You begin to realize, even if I do have the news first, what do I do with it?

Have you ever heard of a stock gapping up big on fantastic earnings; then selling off for 2 weeks? We have all seen it. Good news reacted to in a negative way; bad new reacted to in a positive way. Or, good news reacted to in such a positive way, that the stock gaps so far you are not sure what to do. How do you make sense of all this?

First of all, you may want to just turn off the news. Yes, that is correct. You can keep a list of the stocks that are ?in the news? for your watch list if you like. However, you can skip the part about researching the news. This does not sit well with many traders. They feel it is ?their job? to research these things. The truth is, you cannot. We play people?s reactions to the news, not our personal view of what the news is. We do this by looking at charts.

Below are some examples. Two of them resulted in plays. Take a look at what happened, compared to the news. These three were picked because they all solicited a strong view from many traders, even by email. ?Did you know that xyz had bad news today and are playing it?

Take McDonalds on Dec 24, 2003. You may remember the mad cow scare that day. All ?hamburger places? gapped down, and the overwhelming consensus was (even CNBC told us this) that this scare is the end of the American Hamburger. It would be a ?no brainer? to short these stocks, as they are certain to fall more.

Well, if they are certain to fall more, why didn?t they open at that lower price? You see; there are no gifts. The news was out and was digested by the public. What the stock does after that is not a function of ?good or bad? news. It opens at equilibrium; and then the move can be in either direction. The chart pattern (without any concern for the news) was bearish, but it did not form a ?pattern? that we recognize as a trade. No play was made, though there were possibilities for intraday plays once the trend was set. Notice how long the ?bad news? continued to ?hurt? the stock. Why did it go up? Who knows. Well, there were many commentators and analysts that told us the answer after the close. One of the stories was that the shock sent beef prices tumbling, which would reduce the operating costs of fast food restaurants. Now why didn?t we think of that?

Next is Marathon Oil. Here there was little chance for failure. The company was doing a ?secondary offering? or something similar. On the morning in question, they actually came out and priced the stock below the current price (below where it opened even). Certainly this stock had to go down further. Well, this time, the chart showed a pattern we know well; a tactic known as a Gap play. How could a stock go up in this situation? Read the McDonalds paragraph above. All the answers are the same. We don?t understand enough about secondary stock offerings to try to explain it. Or, if we do understand, it is not worth explaining. That is the point. The best way to play this was to have no knowledge of the actual news; just to know the stock was gapping so you can find the play.

Last was a past play on Delta Airlines. This is a favorite because we had the analysts, coming in to help us determine when to buy and sell stocks.

The big news posted was that Delta may have to file for bankruptcy. Well, we guess that means the stock is worth ?zero?? Or is it worth ?asset value?? That day the stock did not go below $4.53. On the next day, we have a revision of Delta Airlines? outlook to ?negative?. The day after that, Moody?s decides it may cut Delta?s ratings. The stock talks bankruptcy, and then analysts downgrade it? Do we need to pay analysts for this keen information and insight? Note, the stock had never traded under the low set on May 10th, the day the news of bankruptcy was released. Notice the volume that came in on that day. Notice that this volume came in after the stock already dropped 66% in four months. Mr. Analyst, you are now down grading the stock? Where were you during this huge fall? Waiting for the company to tell us they are in trouble? This stock was played long on May 12th at $4.67.

News will move stocks. It can be a means of finding stocks to watch and see if any technical patterns form. Do not get caught up in the game of trying to make trades based on your ?analysis? of the news. Everyone is different in how they handle thing. If you have a difficult time with news, we hope this was helpful to you.

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A long time reader wrote in asking if you get more bang for the buck buying an out of the money option, or a deep in the money option on a stock that makes a big move. Interestingly the answer isn’t perfectly cut and dry. Let’s look.

If you buy an in the money option, that option will indeed track the movement of the underlying stock more closely than an at the money option. The Delta or measure of value is much higher, so when the stock moves, the option tends to move also.

If you buy an out of the money option, the stock can actually rise a bit, and yet your option could actually fall. How? When an option is out of the money, the entire value of the option is simply based on time. For instance, lets say the XYZ company is trading at 50 bucks a share. The September 60 dollar call options are 75 cents. That 75 cents is all time value considering the fact that XYZ is still ten dollars shy of the strike price.

So, it’s quite likely that XYZ could move up to 52 dollars a share, which is a two dollar move, and yet the September call option falls to 50 cents. Why? We have come closer to the expiration day, and some of the time value has eroded.

In a deep in the money option, a 2 dollar stock move could be as high as a 1.95 move in the option. So, looking at it like that, standard theory says that deep in the money options will move more on a big stock move and for the most part you can consider that to be true. But there is always the exception, and if you look at percent returns, that’s where things really get screwy.

Let’s say you bought September 25 dollar calls on XYZ. You paid 29.00 for them, considering that XYZ is 50.00 a share, you are already 25 bucks in the money and they are charging a 4 dollar premium over that for time. Now, XYZ announces that it’s cured cancer and runs to 90 dollars a share. Your call option is going to soar. At very minimum it’s going to be worth 65 dollars, and more likely over 70. So, you’re return is quite nice right? Right. In fact you’ve made somewhere north of 124%.

But, lets say you had those XYZ out of the money 60 dollar calls for just 75 cents. If XYZ ran to 90 those calls would be worth a minimum of 30 bucks, if not 35 ( depending on how much time was left) Now look at the percent return. It’s 3,900 percent.

So, here’s the deal. For the most part, deep in the money options will reward you more frequently and with more gains than at the money or out of the money options. But, in those rare events where a home run gets hit, an out of the money options bought for pennies will far outperform any in the money options.

You’re better off buying deep in the money and using smart trading strategies. But occasionally it’s a lot of fun to be able to say I made 2000 percent on my latest trade! Think about it.

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