This strategy can be simple or hard, it depends how you use it. In its simple form, you will have noticed that whenever big news comes out about a company, whether it’s record profits, winning a major contract, or some bad news, often the shares react dramatically, frequently over-reacting and settling down later. Does that sound like something you would be interested in as a spread better?
There are some problems with trading the news. You need to keep right on top of it, as there are many professional traders with news feeds who will act quickly on any news. In a sense, you are competing with these big boys, who have at least instant information, if not (perish the thought) some inside knowledge. If you pay for a squawk feed, in fact some may be free, you’ll get the news soon enough. The problem will be that your order will not get filled at the price you want it to. The market can move faster than you can hit buy or sell, you could end up getting in at a much worse price.
This is not to say that you have to be in on the initial reaction to bad news. For instance, very often bad news will hit a share price hard, only for the price to come back up later when traders realize that it doesn’t affect the fundamentals much. You can plan to bet on the recovery, which gives you a little time to plan and anticipate your bet. A recent example of that was BP with the famous leak in the Gulf of Mexico. Share prices plummeted by 40%, and there was a handy bounce back as the company continued to give assurances that this was just a section of its business, and that most of what it did was unaffected. Now (2011) I see that they are declaring record profits for the year so far, and the oil spill is just a memory to the investors, even if not to the residents and businesses affected by the tragedy.