Skip Raschke: Stock Trading Halts, Part 3
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Most individual stock trading halts are of the gap and trap variety (Gapped and Trapped "> Gapped and Trapped ) . Thus, those gapped and trapped are not happy traders or investors. The shock to the system from the time of the announced trading halt tends to irresistibly morph into fear as they who are entrapped are caught in the web known as long or wrong, or, short and instantly shorter!
A halt of a stock is a trumpeted clarion call sounded too late for all those who have been gapped and trapped. It is at this time that their worst fear creates even more panic. For those outside of that trading mess, peering into the panic, they should be licking their proverbial chops because a highly probable short term top or bottom (depending) is about to form soon after the halt has been removed. It is human-natural that a yell of Fire! will cause the proverbial theater to empty post haste. The stock market's proverbial yell of "Fire!" has the same effect on a stock's price. This type of trading action is vacuum-like because it tends to clean up the halted stock's sellers or buyers, depending.
The best course of action for an options trader post-halt is to buy an at-the-money vertical spread because the vols will most likely be nicely pumped in the out-of-the money options. In addition, the at-the-money options should be less pumped up in price as per the upward revaluation of the vols post-halt.
Whatever you do however, do not open a negative gamma position early in the process as the volatility contraction period intended for that options strategy to be successful does not instantly follow once the trading in the stock begins post halt. Thus, a front spread, the negative gamma type, is not the initial tactic to use. Most professional trading firms want to see the trading action (stock and options activity) before they attempt to re-position themselves post-halt and post-news dissemination as that is prudent. The simple rule to follow here is: do not be pioneers. Let the big boys carve out the next price trend first.
For those who follow contrary opinion strategy the vertical call spread would be the tactic for any stock halted based on negative news and the vertical put spread would be the tactic for any stock halted based on positive news. As always, average into either position in three separate lots so as to average the price as well as prudently managing your capital (See the series: Averaging In ).