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Several years ago I put together a short investment thesis, which was based on Martha Stewart being convicted and the company she founded, Martha Stewart Living Omnimedia (MSO) , suffering as a result.

As it turns out I was correct: She was convicted, sentenced to jail and her company paid the price. The stock fell dramatically. This is an example of an event driven trade.

Sound interesting? Then let's take a closer look at event driven trading and a few compelling events on the horizon.

Event Types

There are a multitude of events which are suitable for event driven trades. Here are some of those events which are suitable to this strategy:

Earnings Release/Conference Call:

I have discussed earnings and conference calls in great detail on



The Finance Professor: Beginner's Guide to Earnings Calls

Five Missteps to Avoid in Earnings Season

Conference Calls: The Good, the Bad, the Misunderstood

(Jan. 2, 2008)

Conference Calls: The Good, the Bad, the Misunderstood

(Aug. 21, 2008)

Prior to a company issuing its quarterly results, it is important for you to develop your own expectations of those quarterly results and compare them to the consensus estimates of Wall Street analysts. If you strongly believe that the actual results will vary dramatically from the analysts' consensus, then you can buy or short the stock in advance of the earnings release.

Economic Data:

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TheStreet Recommends

We are deluged with economic data from the U.S. Government, universities and trade organizations. The frequency of releases for these data points vary -- weekly (such as jobless claims), monthly (such as unemployment rate) or quarterly (such as gross domestic product). A survey of economists will determine the consensus estimate for an economic data point versus which traders can anticipate a positive or negative market reaction based on their own assessment of the actual data point.


Lawsuits, court rulings, trials, legislative actions, FDA decisions, etc. all have potential impact upon individuals companies or business sectors. A great example of this type of event trading surrounded the

Research In Motion

( RIMM) /



NTP had sued RIMM for patent infringement. While this suit was still being adjudicated, Research In Motion was unable to develop and market new products. The lawsuit went through several levels of legal review. If you were really following this lawsuit, you were required to not only keep up with the news about the litigation, but also required to read court decisions. In the end, Research In Motion and NTP settled, thus setting up the multi-year bull run in RIMM.

Product Announcements:

Companies will often unveil new products in a public event. This take places at a company-sponsored event, such as


(AAPL) - Get Apple Inc. Report

MacWorld or at an industry-wide event, such as the Detroit Auto show. Often, stock market participants will anticipate these announcements and buy stock in advance. Sometimes, the company may surprise the public with an unexpected announcement. Being able to anticipate how the markets will react to such events is another event driven trade opportunity.

So, How Do You Trade an Event?

There are several steps to the process:

1. Develop a thesis based on your expectations for the particular event.

Determine if you want to take a bullish or a bearish stance versus the outcome of the event.

2. Support your thesis with the right asset mix.

Use a strategy of stocks, options, futures, bonds or exchange-traded funds (ETFs). The execution of your strategy does not have to be immediate. You can layer into your position over time.

3. Develop an exit strategy.

Know what you need to do if your thesis does not play out. Understand the worst possible outcome if the event does not conclude in your favor.

4. Monitor news and data.

Carefully monitor news and other pertinent data points, which may affect your strategy or impact the outcome of the event. Adjust your thesis or strategy, if neccessary.

5. Observe the event and exit the trade.

I cannot emphasize enough the importance of terminating your strategy and exiting your positions once the event has occurred. This was a trade and should not be turned into a investment -- win, lose or draw.

Mark Your Calendar

Here are a few upcoming dates and events worth watching:

Dec. 5 -- The monthly labor report from the Bureau of Labor Statistic.

Included in this report will be non-farm payrolls, the unemployment rate and average hourly earnings.

Dec. 16 (estimated) -- Goldman Sachs's (GS) - Get Goldman Sachs Group Inc. (The) Report earning report.

Goldman Sachs has become a battleground stock as everyone from bulls and bears to traders and investors argue over whether or not the company will report a gain or a loss. Analysts have been rapidly bringing down their estimates for the quarter. This should be an evolving situation as we get closer to their earnings release.

The Employee Free Choice Act (to be announced).

Under this act labor unions would be able to organize by having laborers check off a card rather than engaging in a secret balloting process. Opponents of this bill contend that it would create an environment of coercion. Companies which do not have a unionized labor force, such as


(WMT) - Get Walmart Inc. Report

, could be adversely impacted if this bill passes. The newly elected Congress and President are certain to pass this act.

The FDA's review of Byetta (to be announced).

The U.S. Food and Drug Administration is currently reviewing the label for


( AMLN) diabetic treatment Byetta. The future for Byetta and a second-generation longer acting version, Byetta LAR, could be in jeopardy, depending on the FDA's decision.

Your Homework

For the events I just identified, develop a thesis and test it out.

Identify other upcoming events that could yield trading opportunities or might be market movers.

At the time of publication, Rothbort was long AAPL, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site


Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at

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