NFP and options, a good match

The EURUSD has been on a constant decline since it reached a most recent high at 1.13420. Failure to go past that level brought price lower again in 7 straight down days to its most recent low at 1.11434. The most recent action by the ECB to lower interest rates even further has weighed heavily on the Euro. The ECB’s lending rate is now zero percent and the deposit rate is now minus 0.40%.

The only alleviation for the Euro comes from talk of the Fed down playing their chances of hiking interest rates anytime soon. In fact, the Euro rallied after the last Federal Open Market Committee (FOMC) meeting, where the tone set during the speech was for continued surveillance of economic conditions, meaning let’s wait before taking any further action. The EURUSD went from a low of the day at 1.1057 to 1.1434 within the space of two days.

The Fed’s members and the Fed chair Yellen have stated various times that the two metrics they are monitoring closely to determine monetary policy are: inflation and job creation. The latter being the more important factor as they believe that inflation will rise as a consequence of sustained high job growth. Although Yellen’s latest comments have been cautious the CEO of the Federal Reserve of Atlanta, Dennis Lockhart, has stated that the US may be in line for an interest rate hike as soon as the April meeting on the 26th.

We have some important data release, however, before we get to the next FOMC meeting. This Friday at 13:30GMT will see the release of Non-Farm Payroll data for the US for February. Expectations are for another large increase of around 204k new jobs. That number is lower than the previous surprise number of 242k at last month’s release. If the actual number meets expectations we can expect the US dollar to strengthen further against most currencies; whereas a much higher or lower number should create a considerable amount of volatility.

If you think the EURUSD will see a rise in volatility over the next week then all you may buy a Straddle, which consists of simultaneously buying a Call and a Put Option with the same strike, expiry and amount.

The screenshot below shows a EURUSD Buy Straddle strategy with a strike at 1.11785, expiry 7 days and for €10,000 would cost $129.57, which would also be the maximum risk.

This screenshot shows the profit and loss profile for the above strategy, just click on the Scenarios button.

On the other hand if you think volatility will remain stable or decrease over the next week, then all you may sell a Straddle, which consists of simultaneously selling a Call and a Put option with the same strike, expiry and amount.

The screenshot below shows a EURUSD Sell Straddle strategy with a 1.11844 strike, expiry 7 days and for €10,000 would produce a revenue of $108.93 with a total risk of $332.61.

This screenshot shows the profit and loss profile of the above Sell strategy.