The first Friday of every month has one of the most volatile (and therefore anticipated) announcements. It is called Non-Farm Payrolls (NFP). The nonfarm payrolls released by the US Department of Labor presents the monthly change in number of people employed excluding the farming sector. Generally speaking, a high reading suggests rising employment and is seen as good for the USD, while a low reading is seen as bad.
Last month’s NFP numbers were 295K, this month’s consensus is lower at 244K. If NFP exceeds consensus, EUR/USD may fall and break-through the bottom support heading towards parity. On the other hand, if NFP reports in less than expected, EUR/USD could rise making up some of its losses from the first quarter.
So, the market will most likely be volatile on Friday, and in these event driven instances, you can trade volatility using a long strangle option strategy.
Creating the Long Strangle
This involves buying an out-of-the-money (OTM) Call option and an out-of-the-money (OTM) Put option. If the market rises the Call will profit and if the market falls the Put will profit. (Please refer to the Call and Put Lessons on Moneyness if you would like to better understand the terms ATM, ITM, and OTM).
Note: The strangle strategy differs from a straddle which involves buying both Call and Put options at-the-money (ATM), and since OTM options are cheaper the long straddle, it is a cheaper strategy.
To buy a EUR/USD Long Strangle, buy a EUR/USD Call option with a strike above the market rate and a EUR/USD Put option with a strike below the market rate. See example below using strike rates +/-1% from market.
The chart below shows a Long Strangle strategies’ profit or loss at expiry over a range of market rates.
Advantages:
- Can profit from a move in either direction
- It is cheaper to buy compared with a Long Straddle
- You will not get stopped-out
- Your maximum loss is limited to the premium paid at open
Disadvantages:
- Break-even points, at expiry, are further away compared with a Long Straddle
- Time value is against you
You are trading the expectation of increased volatility without taking a view on direction, therefore this strategy is commonly used over major economic announcements. You may choose to use a long strangle over a long straddle if you expect extreme volatility and want to enter a position at a smaller risk, i.e. increased leverage.
The content provided is made available to you by ORE Tech Ltd for educational purposes only, and does not constitute any recommendation and/or proposal regarding the performance and/or avoidance of any transaction (whether financial or not), and does not provide or intend to provide any basis of assumption and/or reliance to any such transaction.
Editors’ Picks
EUR/USD fluctuates near 1.0700 after US data
EUR/USD stays in a consolidation phase at around 1.0700 in the American session on Wednesday. The data from the US showed a strong increase in Durable Goods Orders, supporting the USD and making it difficult for the pair to gain traction.
USD/JPY refreshes 34-year high, attacks 155.00 as intervention risks loom
USD/JPY is renewing a multi-decade high, closing in on 155.00. Traders turn cautious on heightened risks of Japan's FX intervention. Broad US Dollar rebound aids the upside in the major. US Durable Goods data are next on tap.
Gold keeps consolidating ahead of US first-tier figures
Gold finds it difficult to stage a rebound midweek following Monday's sharp decline but manages to hold above $2,300. The benchmark 10-year US Treasury bond yield stays in the green above 4.6% after US data, not allowing the pair to turn north.
Worldcoin looks set for comeback despite Nvidia’s 22% crash Premium
Worldcoin price is in a better position than last week's and shows signs of a potential comeback. This development occurs amid the sharp decline in the valuation of the popular GPU manufacturer Nvidia.
Three fundamentals for the week: US GDP, BoJ and the Fed's favorite inflation gauge stand out Premium
While it is hard to predict when geopolitical news erupts, the level of tension is lower – allowing for key data to have its say. This week's US figures are set to shape the Federal Reserve's decision next week – and the Bank of Japan may struggle to halt the Yen's deterioration.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.