How to Trade the Next 'Dreamliner-like' Story

You, like most other traders, likely missed out on some big profits when the news of Boeing BA’s recent Dreamliner troubles broke on Friday. Let’s look at how not to miss it next time.

You probably didn’t miss the news but just in case, here’s what went down. On Friday afternoon, breaking news preempted regular financial news coverage reporting that there was a fire aboard a 787 Dreamliner at London’s Heathrow Airport.

The stock quickly plummeted more than seven percent but as the trading day ended, the stock finished the day with only a 3.6 percent loss.

Over the weekend, it was found that the fire had nothing to do with the recent battery fix that grounded the Dreamliner for three months. As a result, the stock was up 6.3 percent by the close of trading Monday.

Related: The Latest on Boeing’s Newest Dreamliner Headache

You’ve seen this happen in the past and might have kicked yourself for not getting in when the stock was at its lows. Here’s how to capitalize on news like this the next time it happens.

Have cash available- The reason you’re never fully invested is for times like these. Capital has to be at the ready to deploy.

Watch for setups- The Boeing story was perfect. The three month grounding of the 787 was a big news event that caused investors to lose a considerable amount of money. When a big event like this happens, any future news that relates to the past event will become a major news story.

In this case, aircraft have problems all of the time. Friday’s story would have been minor if it weren’t for Boeing’s recent issues with the Dreamliner. As you learn of big events with any company, remember that future events will likely be blown out of proportion. That presents a trading opportunity as investors remember past losses. Investingis emotional even if all of the textbooks say that it shouldn’t be.

Have a strategy ready- When these stories break, you have to act fast. You don’t have time to put together a trading strategy. If the stock drops, you can go long the stock or purchase a call option if you’re looking for the simplest strategies. (If you use these strategies, use tight stops.)

Because you don’t know if the news is as severe as the price action would have you believe, hedge your bet. You could go long the stock and purchase a put option to cap your losses or employ a more advanced strategy like a call or put option spread. Whatever your strategy, have a plan in advance. This lessens the chance of investing with emotion and allows you to act quickly.

The cornerstone of your strategy should be: When the trade starts to go against you, get out fast.

And finally, the disclaimer:

This is not an investing strategy. It’s something akin to heading to the horse track and betting on your favorite thoroughbred. You should never use retirement funds for such a speculative endeavor nor should any significant portion of your portfolio be allocated towards this strategy.

Finally, there’s nothing amateur about not playing these types of moves. The professionals only trade where they’re comfortable. You should too.

Disclosure: At the time of this writing, Tim Parker had no position in the above mentioned stock.