What equity options are saying about tomorrow's jobs number

When December jobs data was released, stock prices rose marginally despite a disappointing 78,000 reading. And just five days later benchmark indices reached record highs just in time for global slowdown fears to fuel contagion worries causing worrywarts to dump equities. The selling, nevertheless, dried-up earlier in the week, and a glance at the S&P 500 chart shows how investors are taking a chance that the correction is offering them a rich buying opportunity. Two reasons explain the bias for a rebound. First, the weather appears to have distorted economic data, standing in the way of regular business and hampering the momentum of the recovery. Second, private payroll processor ADP appears to be offering a consistent reflection of the health of the labor market. Yes, they say, there was some slowdown caused by the weather. And while they do not expect such mechanics to persist, their headcount appears far less worrisome than the official government report. Revision to year-end data was meek, according to ADP, while January’s payroll addition was in-line with those witnessed on average over the last six months.

Chart – S&P 500 index reached 3-month low this week before rebounding

 According to current option market pricing, traders are also assigning greater risks that the current rebound will be sustained into the weekend rather than expecting further selling. Using SPY options series expiring following the release of the employment report, the IB Probability Lab displays stronger likelihood that the underlying SPDR S&P 500 ETF Trust will close higher than it is currently priced. We have annotated the distribution with vertical lines to show the recent lows (around 1750), the current trading price (around 1770) and the weekly and bi-weekly highs at 1793 and 1828. And while the Probability Distribution shows a 90% likelihood that the S&P 500 index will fail to breach 1795 on the upside, it also shows slim odds of breaching the week’s lows. In fact options premiums currently reflect a 25% or one-in-four chance that fresh lows will be seen following the employment report on Friday. 


Chart – Stock rebound and consistent ADP report has option traders banking on a rebound for stocks


About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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