Although I am a believer in using options to hedge positions and reduce list, there is no doubt that there are many speculators who use options.
The purpose of today’s post is to warn those speculators about a dangerous trap — one that can be avoided.
When a news release is pending, option volume increases because the news may result in a gap opening for the stock price (when the news is better or worse than expected). That is when option buyers make good money — assuming that they got the direction right.
However, there is much more to trading options under these circumstances than the novice trader can anticipate. That option volume pushes prices higher and you cannot pay whatever price is asked when buying options. At least you cannot do that and expect to succeed.
Read more about this scenario at my about.com site.
The discussion continues with a description of how implied volatility is crushed once the news is released. If you are not familiar with the concept that the price of options in the market place is very dependent on implied volatility, take a look here and here.
One method for significantly reducing the cost of playing this game is to trade call or put spreads instead of buying individual options.