Chapter 5. Special Events

Key Concepts

• Traditional option pricing is based on the assumption that markets trade continuously. In reality, the market is open for 6.5 hours and closed for 17.5 hours on normal trading days, and closed for 65.5 hours each weekend. The relative magnitude of these distortions increases sharply as expiration approaches.

• The market efficiently responds to these distortions by depressing and inflating option prices in predictable ways. These changes can be used as the basis for highly profitable trades.

• News events often create brief inefficiencies as the market absorbs and responds to new information. These inefficiencies represent outstanding trading opportunities that sometimes persist for several hours. ...

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