Using options to profit from a volatility inducing jobs report

With the most important day of the month coming up, future traders are preparing for the new employment level. What this number does is provide the traders with huge opportunities to turn a great profit, but at a high risk. To turn large risks into profits, traders must set wide stops when selling or buying futures ahead of the number.

Last week the number of Americans seeking unemployment benefits decreased by 11,000 to a seasonally adjusted 346,000. This is a level consistent with steady growth in jobs. According to the labor department, applications have dropped from a previous 357,000, which was adjusted up from the initial 354,000. A representation for layoffs is the weekly number of applications, which tumbled 6% in the last six months and also hit a five-year low of 338,000 in early May.

Decreasing layoffs is only half of increasing the future of jobs, the other is on the side of companies hiring. The problem here, though, is that companies have been very cautious about hiring people and creating more jobs. Tomorrow the government comes out with the updated unemployment number, which economists expect to show a modest growth of about 170,000 jobs.

With heightened volatility around the number, a trader is presented with opportunity. The best way to trade the number is by using a product that tracks the S&P 500.

There are several ways you can trade the S&P 500:

  1. 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.
  2. Buy the ETF. The SPDR S&P 500 ETF Trust (SPY). Although this also would be capital intensive, this is an easy position to manage.
  3. 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.

Because options on futures give us the best risk vs. reward set up, especially around catalyst events, we can use them to set up a bullish and bearish strategy ahead of tomorrow’s number.  The E-mini S&P 500 future options are implying a move by tomorrow’s expiration of around 17.75 points as calculated by the at-the-money straddle. With futures trading at 1,609.00 we can use this to calculate an upside target of 1,626.75 and a downside target of 1,591.25. With these targets we can set up trades.

Bullish Setup:
Trade: Buying the ES Jun 7th 1615-1625 Call Spread for 3.45
Risk: $172.50
Reward: $327.50
Breakeven: 1,618.50

Click to enlarge.

Bearish Setup:

Trade: Buying the ES Jun 7th 1600-1590 Put Spread for 2.00
Risk: $100 per 1 lot
Reward: $400 per 1 lot
Breakeven: 1,598.00

 

Click to enlarge.

About the Author
James Ramelli

James Ramelli is the Moderator of the Live Futures Options Trading Room at KeeneOnTheMarket.com where he actively trades futures and options on futures while educating members on strategies, setups and risk management. He has a degree in Finance with a focus in Derivatives Trading and Financial Engineering from The University of Illinois and has been trading for five years. James appears regularly on Bloomberg T.V. and BNN and writes a weekly column for Futures Magazine.

Comments
comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome