The most important day of the month for futures traders is upon us, with the all-important employment situation to be announced tomorrow. The jobs number provides traders the opportunity to make huge profits, but at a high risk. Buying or selling futures ahead of the number would require a trader to set wide stops, in turn risking large amounts of capital. Options on futures can help a trader avoid this problem.
In light of recent economic data and the news out of North Korea, many investors find this market to be a risky buy at these levels. We have backed off from all-time highs multiple times and the risk in this market is definitely to the downside. Ahead of tomorrow's jobs number traders will surely be looking to hedge their investments or speculate on direction.
There are several ways you can trade the S&P 500:
- Buy Individual stocks in the S&P 500. This is a very capital intensive way to take a view on the index. It does, however, offer the opportunity to leg out laggards and add to winners, but this strategy may not track the index perfectly.
- Buy the ETF. The SPDR S&P 500 ETF Trust (SPY). Although this would also be capital intensive, this is an easy position to manage.
- E-mini S&P 500 Futures and Options. This gives a trader the best opportunity to set up a great risk vs. reward trade while tracking the performance of the index very well. This is also one of the most liquid futures markets.
Although all of the above are viable ways to trade the number, options on futures are the best way to play a catalyst event. Let’s look at examples of how a trader can take a bullish or bearish view on tomorrow’s number.
With ES futures currently trading at 1550.25, the at-the-money straddle is implying a move of 11.75 points by tomorrow’s expiration. This gives us an upside target of 1562 and a downside target of 1538.50. Now that we have targets, we can use them to look at possible options strategies.
Possible Bullish Set-up:
Buying the ES Apr 5th Weekly 1555-1565 Call Spread for 2.45
Risk: $122.50 per 1 lot
Reward: $377.50 per 1 lot
Possible Bearish Set-up:
Buying the ES Apr 5th Weekly 1550-1540 Put Spread for 2.40
Risk: $120 per 1 lot
Reward: $380 per 1 lot
Both of these trades are setting up for great risk vs. reward ratios and offer a trader a risk effective way to speculate on the unemployment number.