Protecting your long position before tomorrow’s jobs report

December 5, 2013 05:04 AM

Tomorrow morning markets will react to the release of the November unemployment number. This release is likely the last significant data release of the year and will be watched very closely as market participants look for clues for when the Fed might taper its $85 billion a month bond buying program. Analysts are expecting Nonfarm Payrolls to come in around 180,000 for November. They are also expecting the unemployment rate to downtick from 7.3% to 7.2%. Markets have been shaky leading into the number with the Dow Jones Industrial Average selling off for four straight days and looking like it could close lower today. The options market is currently implying a move of more than 14 points by tomorrow’s expiration, meaning there could be a large move on tomorrow’s number.

Buying or selling futures ahead of this number can be a very risky proposition as it is very easy to get chopped up around important data releases. Options can help a trader avoid taking on too much risk when speculating on data releases, but can still set up for huge reward potential. Using the implied move we calculated from the options market we can look at both bullish and bearish trade setups in E-mini S&P 500 futures for tomorrow’s release of the employment situation.

Bullish Setup: Buying the ES Dec 6th 1800-1805 Call Spread for 1.00
Risk: $50 per 1 lot
Reward: $200 per 1 lot
Breakeven:  1801.00

With E-mini S&P 500 futures trading around 1790 this trade sets up well as the measured move target provides a 4-to-1 reward to risk ratio.

Bearish Setup:  Buying the ES Dec 6th 1780-1775 Put Spread for 1.25
Risk: $62.50 per 1 lot
Reward: $187.50 per 1 lot
Breakeven: 1778.75

This trade sets up with a very similar reward to risk ratio and allow a trader to net a very nice profit should futures sell off to the measured move target.  Both of these trades are more risk efficient ways to trade the market and speculate on tomorrow’s number.

About the Author

James Ramelli is the Moderator of the Live Futures Options Trading Room at 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.