In our quest to understand trading options for income, we need to be aware of events, whether scheduled or not, that affect the markets in terms of magnitude and duration. An excellent example occurred recently with the situation in the Ukraine.
On February 28, 2014, Russia sent troops into Crimea, and acting Ukrainian President Oleksandr Turchynov said Russia is attempting to seize the territory. This occurred after stern warnings by President Obama.
The news rocked the markets the following Monday which gapped down at the open. This unexpected event led to an increase in uncertainty as to its impact: magnitude and duration.
Magnitude is a measure of how far the markets move in price; duration is how long the markets will be impacted.
As Monday unfolded, the gap down in the SPX (S&P 500 index) was filled (meaning the price rose above Friday's low) indicating that its magnitude might be contained. Expectations prior to the opening on Monday, with the S&P E-mini futures down over 21 points, was for a 30 point or greater move down in the SPX.
The situation in the Ukraine was fluid, and the worst price movement during the day was 23 points down. By the end of the day, the SPX close down nearly 14 points.
Was this the total magnitude? And what would be the duration of the event? These questions remained open, since the situation was still fluid.
Before the next day, Russia pulled back its troops (to their bases) in the Crimea avoiding any escalation of the event. The E-mini futures in pre-market hours on Tuesday rose over 21 points, indicating a major reversal.
The markets gapped up at the open on Tuesday with the SPX rising over 30 points before closing 28 points up. This reversal cause the markets to reach new all-time highs.
What we can learn from this event is that news drives the markets; especially unexpected news.
In conclusion, it is difficult to determine the magnitude and duration of any unexpected event that is fluid. And while it appears the impact has ended, it has not. Only time will tell the true impact of this event.
If you would like to learn more about options, and how to generate consistent weekly income trading options, go to Options Annex.