Definition
Event-driven trading is an approach in which positions are built around a specific catalyst, a scheduled or anticipated event expected to move the price of the underlying. Common catalysts include earnings reports, central bank announcements, drug trial results, and merger news.
In options markets the approach is distinctive because option prices already reflect the market's expectation of a coming move. The challenge is not predicting that something will happen, but judging whether the expected reaction is over- or under-priced.
Why it matters
How it works
Before a known event, demand for options pushes up implied volatility, making contracts more expensive. After the event resolves, that uncertainty disappears and implied volatility collapses, an effect often called volatility crush. A trader who simply buys options before earnings can be right about the direction yet lose money as the inflated premium deflates. Skilled event-driven traders therefore weigh the size of the priced-in move against their own estimate, and may sell premium, use spreads, or build structures such as butterflies that profit from a contained outcome.