Traders anticipate non-farm payroll on the first Friday of the month as one of the biggest market movers of the entire month. This is true regardless of whether you trade stock indices, precious metals, crude oil or foreign exchange; the NFP release can lead to a volatile day. Currently, more notice is given to the NFP number due to its implications of the overall economic posture, as there is great speculation concerning potential interest rate action from the Fed.
On non-farm payroll day, traders face the particular challenge of anticipating of the market response to the NFP number. The market will often see false breakouts occur before the market settles on a direction for the day; and if a trader is attempting to trade an instrument based on a viewpoint of whether the NFP number will be a hit or a miss, often times currencies, equities and gold may react differently than anticipated. Sometimes the markets that we expect to drop on a missed NFP payroll number will actually rally higher, or markets that usually benefit from a disappointing NFP may actually trade lower.
Fortunately, traders have an opportunity to trade the actual non-farm payroll number itself, using CFTC-regulated binary options based on the actual NFP release, without having to anticipate the market reaction.
Let’s have a look at the last two monthly releases of NFP. The January release was a disappointing 172K print, while February’s was a surprise 242K; thus, so far this year, the NFP number has been outside the consensus. Meanwhile, historically the March number (which will be released this Friday) has a tendency of being a miss, falling beneath analysts’ expectations. Major banks have forecast a consensus of between 200,000 and 205,000 jobs to be created.
Now let’s take a look at two examples of how to trade the NFP number using binary options. (For both examples, we will refer to the two order ticket images below). These examples are in no way a recommendation, but are used as illustrations. The options that will be used in this example have a basis value of a $100 settlement per contract.
First, we will consider a trade from the perspective that the trend this year will continue, with March’s NFP number either being a strong beat or miss, but without a bias as to which direction. To trade this idea, you could trade a straddle using two options in one trade, buying a 230K NFP option at the offer of $30.00 and selling the 170K NFP option at the bid of $70.
In this binary options strategy, each leg has its own risk and profit potential when traded individually, but a different risk vs. reward when traded together. By itself, the 230K long option has a risk of the $30 premium with a potential profit of $70 on that leg ($100 settlement amount – $30 premium). The 170K short option has a potential profit of the $70 selling price, with a risk of $30 ($100 – $70 selling price). These are the individual risk and profit potentials if you traded these options singly.
Traded together in a straddle, only one leg will be successful, but you would profit as long as the number is a strong miss either way. If successful in either direction, your total profit is found by taking the profit of one leg less the risk of the other ($70 – $30), for a total potential profit of $40 on the combined trade. You combined risk is the found by subtracting the profit from the settlement payout ($100 – $40), or a combined total of $60 of risk. This is a 67% return on risk if you are correct, with a higher probability of success than when trading the individual legs because you can profit in either direction.
Looking at a second trade example using the same binary option tickets, you could trade from the opposite perspective, with the view that the March number will be in line with expectations. Trading this idea, you could buy the 170K NFP option at the offer of $80 and sell the 230K NFP option at the bid of $20. This indicates a viewpoint that the jobs number will be above 170K and below 230K, within a range around the projected forecast.
Let’s look at the risk vs. reward for this consensus trade. Individually, the 170K long option has a risk of the $80 premium, with a potential profit of $20 on that leg ($100 – $80 premium). The 230K short option has a potential profit of the $20 selling price, with a risk of $80 ($100 – $20 selling price). These are the individual risk and profit potentials if you traded these options singly.
Traded together, at least one of the legs would have to be successful, which limits your risk. Your total dollars in risk would be difference between the risk of one leg and the profit of the other ($80 – $20), or a total risk of $60. You combined potential profit is the found by subtracting the total risk from the settlement payout ($100 – $60), or a combined profit of $40. This also yields a 67% return on risk if you are correct. Traded together, you again have a higher probability of success as well as a better return and reduced risk.
These are a just two examples of how to trade the NFP jobs release. Because this trade is on the actual jobs number itself, the reaction of major markets are not a concern regarding the outcome of this trade, giving traders a way to profit on NFP day with a simple yes-or-no proposition.
Regulated, exchange-traded binary options are opening up new possibilities for both new and experienced traders with binary options. Binary options strategies offer the ability to trade based on multiple economic events, equity indices, currencies and commodities.
Note: Exchange fees not included in calculations.