The volatility surrounding news events can rise rapidly, increasing the likelihood that the positions retail futures traders have taken can wind up being loss-prone.
Whether the news is scheduled such as the Federal Reserve's meeting last week about raising interest rates or OPEC discussing the option to cut production of crude oil, the days leading up to and right after current or unexpected geopolitical news can be even more volatile. The rapid spike or decline in prices can result in large losses.
Novice investors should refrain from buying futures contracts too close to when market news occurs, said K.C. Ma, a CFA and director of the Roland George investments program at Stetson University in Deland, Fla.
"The short answer is 'no,'" he said. "It would be dangerous to assume that 'selling on the rumor and buying on the news' is an automatically profitable trade."
Even when the market sentiment appears to be obvious, such as the low odds that the Fed would raise interest rates last week, investors should be wary and cautious.
"In addition to the traditional directional bet, the options and futures markets offer investors a unique forum to profit from the directionless volatility trades, especially around material news events," Ma said.
The premiums to purchase futures or options increases as the volatility rises, which usually occurs with higher uncertainty prior to major announcements. The VIX, the S&P 500 implied volatility, was traded around 17 one week prior to the Fed's rate decision and dropped to 13 immediately after the announcement.
"The resolution of the uncertainty of a prior event, albeit eliminating risk, may be the start of a new uncertainty," Ma said. "The fact that Fed decided not to raise rates in September meeting may produce new doubt whether interest rates will ever be raised or delayed to December meeting."
Predicting that the VIX would dip following the news can be challenging because if the VIX was "guaranteed" to drop from 17 to 13, it would have never been at 17 to start with, Ma said.
"Another piece of evidence to the contrary of the seemingly correct rule is that the VIX should have bounced off from the near historical low of 12-13 by now, amid today's highly anticipated OPEC meeting, unless the outcome of the meeting has been already priced in by the equally intelligent market participants," he said.
Average investors should plan the purchase of their positions with restraint, especially since the majority of them "have no business to trade with publicly available information," Ma said.
"Market participants should be aware that volatility is for trading, but not for investing," he said. "Trading long or short the VIX involves sophisticated timing skills possessed only by professional, institutional traders. Average retail investors should only use volatility trades as a part of a well-diversified portfolio with the aim of controlling risk."
Major decisions by the Fed or other market news can easily skew the outcomes of trades, said Mehrdad Samadi, an assistant finance professor at Southern Methodist University's Cox School of Business in Dallas.
"Markets are known to become relatively illiquid in the minutes leading up to a scheduled news event so this could be a particularly expensive time for investors to execute trades," he said. "Despite three votes of dissent from the Federal Open Market Committee, the most since December 2014, the decision to keep rates was in line with market expectations. As of last week, CME Group Fed Fund futures, a market that reflects investors' expectations of monetary policy, implied only a 15% probability of a rate hike in September."